Developing Countries Small Business Manual

1st EDITION

Sam Vaknin, Ph.D.

Lidija Rangelovska

Editing and Design:

Lidija Rangelovska A Narcissus Publications Imprint, Skopje 2003 First published by United Press International – UPI Not for Sale! Non-commercial edition.

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© 2002 Copyright Lidija Rangelovska. All rights reserved. This book, or any part thereof, may not be used or reproduced in any manner without written permission from: Lidija Rangelovska – write to: palma@unet.com.mk or to vaknin@link.com.mk

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LIDIJA RANGELOVSKA REPUBLIC MACEDONIA

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CONTENTS
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. Small Business – Big Obstacles Making Your Workers Your Partners Going Bankrupt in the World The Inferno of the Financial Director Decision Support Systems Valuing Stocks The Process of Due Diligence Financial Investor, Strategic Investor Mortgage Backed Construction Bully at Work – Interview with Tim Field Is My Money Safe? Alice in Credit Card Land Workaholism, Leisure and Pleasure Revolt of the Poor – Intellectual Property Rights The Author About "After the Rain"

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In the USA.they fire people. only small businesses create new jobs.000 new firms were registered by individuals.Small Businesses .and then became too desperate to operate them? Small business is more than a fashion or a buzzword. in Britain and in Germany. Virtually every Western country has a "Small Business Administration" (SBA). Why this reversal? Why were people so enthusiastic to register companies . official figures show that only 40.but this is a misrepresentation. The same goes. Only a very small fraction really does business and produces income. These agencies provide many valuable services to small businesses: 4 .000 of them still pay their dues and present annual financial statements. to a lesser extent. less than three years later. The big dinosaur firms (the "blue-chips") create negative employment . In Israel many small businesses became world class exporters and big companies in world terms. In 1993. This trend has a glitzy name: downsizing. Sam Vaknin Everyone is talking about small businesses.Big Obstacles By: Dr. Now. These firms are called "active" . more than 90. when it was allowed in Developing countries.

feasibility studies. to local venture capital funds. capital goods (machinery and equipment). They act as capital brokers at a fraction of the costs that private brokers and organized markets charge. They reduce bureaucracy.what are the best ways to provide them with this help? A new business goes through phases in the business cycle (very similar to the stages of human life). a "One Stop Shop". working capital. land.and any other thing which the new start-up venture might need to raise funds to finance its operations. They become the ONLY address which the new business should approach. This saves the new business a lot of money. They assist the entrepreneur in the preparation of business plans. questionnaires . application forms.They help them organize funding for all their needs: infrastructure. to international and multilateral investment sources. But why do new (usually small) businesses need special treatment and encouragement at all? And if they do need it . to the local banking community and to private investors. licence and patent fees and charges. 5 . The costs of preparing such documents in the private sector amount to thousands of DM per document. The SBAs have access to government funds. etc. They mediate between the small business and the various tentacles of the government.

know-how. or to provide an innovative solution to a problem which bothers many. 6 . centred around one exciting invention. They need technical experts to tell them if the idea can or cannot be realized and what it requires by way of technology transfers. etc. A person . They need a marketing expert to tell them if their idea is marketable and viable. or to provide a better solution to a problem which is solved in a less efficient manner. Once the idea has been shaped to its final form by the team of entrepreneurs and experts .the proper legal entity should be formed. a stock or a nonstock company? A research and development (RND) entity? A foreign company or a local entity? And so on.is the formation of an idea. At this stage what the entrepreneurs need most is expertise. process or service. They need a financial expert to tell them if they can get funds in each phase of the business cycle .and wherefrom and also if the product or service can produce enough income to support the business. engineering skills.or a group of people join forces.and if so.The first phase . A bewildering array of possibilities arises: A partnership? A corporation . These crystallizing ideas have a few hallmarks: They are oriented to fill the needs of a market niche (a small group of select consumers or customers). or to create a market for a totally new product or service. pay back debts and yield a profit to the investors.

When the firm is properly legally established. a lawyer must be consulted who knows both the local applicable laws and the foreign legislation in markets which could be relevant to the firm. Free legal advice is likely to be highly appreciated by them. It has enormous tax implications and in the near future of the firm it greatly influences the firm's ability to raise funds in foreign capital markets. A whole host of problems faces the new firm immediately upon its formation. registered with all the relevant authorities and has appointed an accounting firm . No one in the West will give the firm credits or invest in it based on domestic financial statements. Good entrepreneurs do not necessarily make good managers. Management techniques are not a genetic heritage.This decision is of cardinal importance. This costs a lot of money. Accounting systems in many countries leave too much room for creative playing with reserves and with amortization. 7 . Thus. one thing that entrepreneurs are in short supply of. At this stage the firm should adopt Western accounting standards and methodology.it can go on to tackle its main business: developing new products and services.

markets do not always react the way entrepreneurs expect them to react. Sometimes it is better to create a product mix: wellrecognized brands which sell well .taste of what awaits the new business and its initiator. Its contingency funds can evaporate. You see that a lot of money and effort are needed even in the first phases of creating a business. or even whole new business lines. They are exceedingly hard to predict. Today's modern management includes many elements: manpower. finances. he will find the representatives of all the relevant government offices.side by side with innovative products. I gave you a brief .and by no way comprehensive . marketing. disappear and reappear. The sales projections of the firm could prove to be unfounded. On top of that. investing in the firm's future through the development of new products.They must be learnt and assimilated. they develop. How can the Government help? It could set up an "Entrepreneur's One Stop Shop". That is quite a lot and very few people are properly trained to do the job successfully. agencies and municipalities. In one office. 8 . services. Markets are evolving creatures: they change. A person wishing to establish a new business will go to a government agency. authorities. the entrepreneur.

get it going .the entrepreneur will move on to the next room in the same building. environmental projects. The terms and conditions of the financing will be specified for each and every source.finances mainly industry. This tutor will escort the entrepreneur from the first phase to the last. Example: EBRD loans of up to 10 years .interest between 6. The next room will contain all the experts necessary to establish the business. financial services. The entrepreneur will select the sources of funds most suitable for his needs . infrastructure and public services. But entrepreneurs in many developing countries are still fearful and uninformed.He will present his case and the business that he wishes to develop.and proceed to the next room. most important. Having obtained the requisite licences and permits and having registered with all the appropriate authorities . raise funds from both local and international institutions. In a matter of few weeks he will receive all the necessary permits and licences without having to go to each office separately. The solution is simple: a tutor or a mentor will be attached to each and every entrepreneur.5% to 8% grace period of up to 3 years . 9 . They are intimidated by the complexity of the task facing them. Here he will receive a list of all the sources of capital available to him both locally and from foreign sources.and. For a symbolic sum they will prepare all the documents required by the financing institutions as per their instructions.

10 . And then they will wish the entrepreneur: "Bon Voyage" and may the best ones win. He will transform the person to a businessman.He will be employed by the "One Stop Shop" and his role will be to ease life for the novice businessman.

This leaves little room for technological innovation. Whether reality lives up to theory. for instance. the latter might have a longer term view of things. The theory is that workers who also own stocks avoid these cancerous conflicts which. in many cases. Sam Vaknin Also read these: The Principal-Agent Conundrum The Labour Divide . to minimize costs .but this is not applicable in our case) a stock at a specified price (=strike price) on or before a given date. Employee Benefits and Ownership There is an inherent conflict between owners and managers of companies. bring companies to ruin and.Making your Workers Your Partners By: Dr. investment in research and development and in infrastructure. shareholders place emphasis on the appreciation of the stocks (the result of quarterly and annual profit figures). is an altogether different question.V. Stock options are either not traded (in the case of private firms) or traded in a stock exchange (in the case of public firms whose shares are also traded in a stock exchange). the former wish to maximize the value of the stocks (short term).the latter to draw huge salaries as long as they are in power. 11 . In publicly traded companies. A stock option is the right to purchase (or sell . The former want. In the USA. dilapidate them financially and technologically. at times.

Profits derived from such options now constitute the main part of the compensation of the top managers of the Fortune 500 in the USA and the habit is catching on even with more conservative Europe. all employees began to enjoy similar opportunities. the employer awards him with another one. free of charge. 12 . employees are offered the opportunity to buy the shares of the company at a discount (which translates to an immediate paper profit). Under an incentive stock option scheme.huge profits can be realized. Normally such perks were reserved to senior management. In many companies. Creative owners and shareholders began to use stock options to provide their workers with an incentive to work for the company and only for the company. A Stock Option Plan is an organized program for employees of a corporation allowing them to buy its shares. thought indispensable. they are a way to hedge (to insure) stock positions (in the case of put options which allow you to sell your stocks at a pre-fixed price).Stock options have many uses: they are popular investments and speculative vehicles in many markets in the West. With very minor investment and very little risk (one can lose only the money invested in buying the option) . an employee is given by the company (as part of his compensation package) an option to purchase its shares at a certain price (at or below market price at the time that the option was granted) for a given number of years. Sometimes the employer gives the employees subsidized loans to enable them to invest in the shares or even matches their purchases: for every share bought by an employee. Later. as companies realized that their main asset was their employees.

Dividends that the workers receive on the shares that they hold can be reinvested by them in additional shares of the firm (some firms do it for them automatically and without or with reduced brokerage commissions). shares of its capital stock (subject to conditions of the Internal Revenue . Another well known structure is the Employee Stock Ownership Plan (ESOP) whereby employees regularly accumulate shares and may ultimately assume control of the company.1981) under which certain kinds of stock options ("qualifying options") were declared tax-free at the date that they were granted and at the date that they were exercised. Such an option was legally regarded as a privilege granted to an employee of the company that allowed him to purchase. A new class of stock options was thus invented: the "Qualifying Stock Option".code). Profits on shares sold after being held for at least two years from the date that they were granted or one year from the date that they were transferred to an employee were subjected to preferential (lower rate) capital gains tax.e.at least for a certain period of time). the options must not be transferable (i. cannot be sold in the stock exchange or privately .the American income tax . 13 . the option plan must be approved by the shareholders. Many companies have wage "set-aside" programs: employees regularly use a part of their wages to purchase the shares of the company at the market prices at the time of purchase. To qualify. His administration passed in Congress the Economic Recovery Tax Act (ERTA . Let us study in depth a few of these schemes: It all began with Ronald Reagan. for a special price..

with a lower exercise price can be issued.but only if the company is otherwise liable to close down ("marginal facility").designed to encourage closer bondage between workers and their workplaces and to boost stock ownership . Employees may offer wage concessions or other work rules related concessions in return for ownership privileges . How much of its stock should a company offer to its workers and in which manner? There are no rules (except that ownership and control need not be transferred). A few of the methods: 14 .Additional conditions: the exercise price must not be less than the market price of the shares at the time that the options were issued and that the employee who receives the stock options (the grantee) may not own stock representing more than 10% of the company's voting power unless the option price equals 110% of the market price and the option is not exercisable for more than five years following its grant. These are programs which encourage employees to purchase stock in their company. when the company needs rescuing . This law .they can even take control (without losing their rights).led to the creation of Employee Stock Ownership Plans (ESOPs). No income tax is payable by the employee either at the time of the grant or at the time that he converts the option to shares (which he can sell at the stock exchange at a profit) . If the market price falls below the option price. another option. Employees may participate in the management of the company.000 USD per employee limit on the value of the stock covered by options that can be exercised in any one calendar year.the exercise period. There is a 100. In certain cases .for instance.

the stock options are converted into shares already held by other shareholders. The company could give one or more of the current shareholders the right to offer his shares to the employees or to a specific group of them. If necessary. Rarely. have the right to buy the same number of shares) . the company issues new shares to meet such a demand.and the workers are then allowed to trade the shares between them 3. comprising shares and options and the employees bid for them in open tender 2. The money generated by the conversion of the stock options (when an employee exercises his right and buys shares) usually goes to the company.1. for instance. 15 . The company offers packages of different sizes. The company sells its shares to the employees on an equal basis (all the members of the senior management. The company sets aside in its books a number of shares sufficient to meet the demand which may be generated by the conversion of all outstanding stock options.

It is only one player (albeit. Should these appraisals be based on market prices . In most cases. This leads to a “technical or equity insolvency” status. there is a debate raging as to what is the best method to appraise the firm’s assets and the liabilities. This is called “bankruptcy insolvency”. there is strong reliance on the figures in the balance sheet.or on book value? There is no one decisive answer. Sam Vaknin It all starts by defaulting on an obligation. If the negotiations with the creditors of the company (as to how to settle the dispute arising from the company’s default) fails. It may be a temporary problem . But this is not the only way a company can be rendered insolvent. Money owed to creditors or to suppliers is not paid on time. complex drama. The court does not participate directly in the script.or a permanent one. the creditors gear up and litigate in a court of law or in a court of arbitration. the most important one) in this unfolding. True. the company itself can file (=ask the court) for bankruptcy in a "voluntary bankruptcy filing".Going Bankrupt in the World By: Dr. It could also run liabilities which outweigh its assets. 16 . As time goes by. interest payments due on bank loans or on corporate bonds issued to the public are withheld. Enter the court.

go into "straight bankruptcy". they receive the property itself . the first to be fully paid off are the secured creditors.Court officials are appointed. as a going concern. The company can. or the "mortgage. They face a tough decision: should they liquidate the company? In other words. rents. 17 . functioning. It makes sense to choose this route only if the (money) value yielded by liquidation exceeds the money the company. taxes. lien"). can generate. Sometimes. Only then are the priority creditors paid (wholly or partially). The priority creditors include administrative debts. entity. etc. should they terminate its business life by (among other acts) selling its assets? The proceeds of the sale of the assets are divided (as "bankruptcy dividend") among the creditors. And only if any money left after all these payments is it proportionally doled out to the unsecured creditors. The secured creditors then receive the value of the property which was used to secure their debt (the "collateral". They work hand in hand with the representatives of the creditors (mostly lawyers) and with the management and the owners of the defunct company. thus. uninsured pension claims. as a living. unpaid wages (up to a given limit per worker). Once the assets of the company are sold.if it not easy to liquidate (=sell) it.

It must be approved by two thirds of all classes of creditors and then. Still. which obstruct the proper functioning of the firm and hinder its chances to recover and ever repay its debts to its creditors. Each state has modified the Federal Law to fit its special.the spirit of the law and its philosophy are common to all the versions. the most famous procedure is named after the chapter in the law in which it is described. again. 18 . in 1994. There was the 1938 Bankruptcy Act. a few things . To eliminate burdensome debt obligations.The USA had many versions of bankruptcy laws. Following is a brief discussion of chapter 11 intended to demonstrate this spirit and this philosophy. it could be voluntary (initiated by the company) or involuntary (initiated by one to three of its creditors). local conditions. To provide a fair and equitable treatment to the holders of various classes of securities of the firm (shares of different kinds and bonds of different types) b. Arguably. The American legislator set the following goals in the bankruptcy laws: a. Chapter 11. 1984 and. which was followed by amended versions in 1978. This chapter allows for a mechanism called "reorganization". lately.

instead. sold separately. become shareholders and shareholders in the insolvent firm usually receive no new claims. at least. Owners of subordinated debentures will. what they would have received in liquidation. new. A more in-depth study of the bankruptcy laws shows that they prescribe three ways to tackle a state of malignant insolvency which threatens the well being and the continued functioning of the firm: 19 . The chapter dealing with reorganization (the famous "Chapter 11") allows for "arrangements" to be made between debtor and creditors: an extension or reduction of the debts.c.and a living business is sometimes worth more than the sum of its assets. long term bonds (known as reorganization bonds. probably. the Securities and Exchange Commission (SEC) of the USA advises the court as to the best procedure to adopt in case of reorganization. A whole is larger than the sum of its parts . discredited. If the company is traded in a stock exchange. whose interest is payable only from profits). What chapter 11 teaches us is that: American Law leans in favour of maintaining the company as an ongoing concern. To make sure that the new claims received by the creditors (instead of the old. ones) equal. Examples of such new claims: owners of debentures of the firm can receive.

Rather. Such a trustee can also be appointed at the request of the creditors and by them. the owners of the debtor) is able to regain possession of the business from the trustee. Chapter 11 . Maybe the biggest legal revolution embedded in chapter 11 is the relaxation of the age old ABSOLUTE PRIORITY rule. the debtor (really. The Interim Trustee is empowered to do the following: • • • • liquidate property and make distribution of liquidating dividends to creditors make management changes arrange unsecured financing for the firm operate the debtor business to prevent further losses By filing a bond. the interests of the creditors have to be balanced with the interests of the owners and even with the larger good of the community and society at large.liquidation A District court appoints an "interim trustee" with broad powers. the debtor remains in possession and in control of the business and the debtor and the creditors are allowed to work together flexibly.reorganization Unless the court rules otherwise.Chapter 7 (1978 Act) . They are encouraged to reach a settlement by compromise and agreement rather than by court adjudication. 20 . that says that the claims of creditors have categorical precedence over ownership claims.

the restructuring of old debts. many countries found it difficult to adapt to the pragmatic. even the granting of new loans by the same disaffected creditors to the same irresponsible debtor. for instance. The receiver takes possession (but not title) of the assets and the affairs of a business in a receivership. When this happens.And so. chapter 11 allows the debtor and creditors to be in direct touch. He collects rents and other income on behalf of the firm. the offspring of chapters 7 and 11: It allows for reorganization under a court appointed independent manager (trustee) who is responsible mainly for the filing of reorganization plans with the court . 21 . Despite its clarity and business orientation. prior to adjudication). In England.and for verifying strict adherence to them by both debtor and creditors. the court appoints an official "receiver" to manage the business and to realize the debtor’s assets on behalf of the creditors (and also of the owners). Chapter 10 Is sort of a legal hybrid. His main task is to maximize the proceeds of the liquidation and he continues to function until a court settlement is decreed (or a creditor settlement is reached. the receivership ends and the receiver loses his status. non sentimental approach which led to the virtual elimination of the absolute priority rule. to negotiate payment schedules.

These features led to 4000 bankruptcies in the wake of the new law .So.but also legally. In the Czech Republic.Bankruptcy is automatically triggered. In Hungary . thriving markets.000 by 5/97.in the eyes of the British legislator and their courts . for instance). A debt to equity swap (an alternative to bankruptcy) supervised by the Ministry of Privatization. b. 22 . Debt for equity swaps are disallowed. each one adopted its own version of the bankruptcy laws. It delineates two rescue programs: a. Economies in transition are in transition not only economically . The Consolidation Bank (founded by the State) can buy a firm’s obligations. British Law is much more in favour of the creditors. It recognizes the supremacy of their claims over the property claims of the owners. if it went bankrupt. Thus. The courts are entrusted with the protection of this moral pillar of the economy. Honouring obligations .a number which mushroomed to 30.the insolvency law comprises special cases (over-indebtedness. at 60% of par.is the cornerstone of efficient. the law provides for a very short time to reach agreement with creditors about reorganization of the debtor. Moreover.

Classic bankruptcy (happens in 23% of the cases of insolvency). The reason is that no one knows the answers to the questions: are the rights of the creditors superior to the rights of the owners? Is it better to rehabilitate than to liquidate? 23 . Reorganization. The pre-war (1934) law declares bankruptcy in a state of lasting illiquidity and excessive indebtedness. There is a separate liquidation law which allows for voluntary procedures.9/93 there were 1000 filings for insolvency. Poland is a special case. No one is certain what is the best model. Sale of the corporate liabilities in auctions 3. new terms. 2. Bad debts are transferred to base portfolios and have one of three fates: 1. debt for equity swaps) and a program of rehabilitation. Each creditor can apply to declare a company bankrupt. An insolvent company is obliged to file a maximum of 2 weeks following cessation of debt payments.But the law itself is toothless and lackadaisically applied by the incestuous web of institutions in the country. There hasn’t been a single major bankruptcy in the Czech Republic since then .and not for lack of candidates. which resulted in only 30 commenced bankruptcy procedures. debt-consolidation (a reduction of the debts. Between 3/93 .

Until such time as these questions are answered and as long as the corporate debt crisis deepens -we will witness a flowering of versions of bankruptcy laws all over the world. 24 .

Shareholders hold him responsible in annual meetings. thankless job. I harbour a suspicion that Dante was a Financial Director. eroded and embittered. It is a no-win. When they are bad – the Financial Director gets blamed for not enforcing budgetary discipline. The job of the Financial Director is composed of 10 elements. When the financial results are good – they are attributed to the talented Chief Executive Officer (CEO). "The Inferno". answers to him and regularly reports to him. mostly for scrutinizing their expense accounts. Very few make it to the top. is an accurate description of the job. He is dreaded by the owners of the firm because his powers that often outweigh theirs. His famous work. Organizational Affiliation The Chief Financial Officeris subordinated to the Chief Executive Officer. 25 . He is thoroughly despised by other managers. Sam Vaknin Sometimes. Here is a universal job description which is common throughout the West. The CFO (Chief Financial Officer) is fervently hated by the workers.The Inferno of the Finance Director By: Dr. Others retire.

however. The same procedures are applied: the Board can summon a worker to testify – the same way that the Senate holds hearings and cross-questions workers in the administration. The Board of Directors resembles Congress. In many developing countries this would be considered treason – but.The CFO is in charge of: 1. 26 . The usual checks and balances are applied: the authorities are supposedly separated and the Board criticizes the Management. the delineation became fuzzier with managers serving on the Board or. Lately. The structure of business firms in the USA reflects its political structure. in the West every function holder in the company can – and regularly is – summoned by the (active) Board. the CFO can report directly to the Board of Directors through the person of the Chairman of the Board of Directors or by direct summons from the Board of Directors. The Accounting Department which answers to him and regularly reports to him. Ironically. worse. where such incestuous practices were common hitherto – is reforming itself with zeal (especially Britain and Germany). Europe. A grilling session then ensues: debriefing the officer and trying to spot contradictions between his testimony and others’. The Financing Department 3. Despite the above said. the shareholders are the people. colluding with it. The Finance Director 2. the Management is the Executive (President and Administration).

the only one who has access to the whole picture.e. They are staffed with cronies and friends and family members of the senior management and they do and decide what the General Managers tell them to do and to decide. Functions of the Chief Financial Officer (CFO): (1) To regulate. He becomes the information junction of the firm. supervise and implement a timely. he can easily enrich himself. full and accurate set of accounting books of the firm reflecting all its activities in a manner commensurate with the relevant legislation and regulation in the territories of operation of the firm and subject to internal guidelines set from time to time by the Board of Directors of the firm. This is somewhat difficult in developing countries. devoid of any will to exercise their powers. He is in a position to blackmail the management and the shareholders of the firm. 27 . outdated European model. Two sets of books are maintained: the real one which incorporates all the income – and another one which is presented to the tax authorities.Developing countries are still after the cosy. intended to cheat the tax authorities out of tax revenues).. The concept of corporate governance is alien to most firms in developing countries and companies are regarded by most general managers as milking cows – fast paths to personal enrichment. Boards of Directors are rubber stamps. The books do not reflect reality because they are "tax driven" (i. But he cannot be honest: he has to constantly lie and he does so as a life long habit. If he is dishonest. General Managers – unchecked – get nvolved in colossal blunders (not to mention worse). This gives the CFO an inordinate power.

a beacon showing the way to a more profitable future. Above all. the adherence to the budget. its flow of funds. In developing countries. possible collaborations. This is wrong. It is a statement of policy.He (or she) develops a cognitive dissonance: I am honest with my superiors – I only lie to the state. So. Managers in developing countries still feel that they are being supervised and followed. the cost of sales and other budgetary items. identification of the competition. (2) To implement continuous financial audit and control systems to monitor the performance of the firm. new management techniques to implement. new markets to penetrate. 28 . this is often confused with central planning. Financial control does not mean the waste of precious management resources on verifying petty expenses. idle). A budget in a firm is no different than the budget of the state. Nor does it mean a budget which goes to such details as how many tea bags will be consumed by whom and where. that they have to act as though they are busy (even if they are. that they have quotas to complete. of the relative competitive advantages. It sets the strategic (and not the tactical) goals of the firm: new products to develop. the expenditures. It has exactly the same functions. is missing from budgets of firms in developing countries. they engage in the old time central planning and they do it through the budget. All this. in reality. the income. a budget must allocate the scarce resources of the firm in order to obtain a maximum impact (=efficiently). unfortunately. most of the time.

A weak CFO is rendered a pawn in these get-rich-quick schemes – a stronger one becomes a partner. from time to time. 29 . The warning signs and barbed wire which separate the various organs of the Western firm (management from Board of Directors and both from the shareholders) – have yet to reach developing countries. Additional functions of the CFO include: (3) To timely. potential problem areas of activity and performance. In both cases. As I said: the Board in these countries is full with the cronies of the management.No less important are the control and audit mechanisms which go with the budget. regularly and duly prepare and present to the Board of Directors financial statements and reports as required by all pertinent laws and regulations in the territories of the operations of the firm and as deemed necessary and demanded from time to time by the Board of Directors of the Firm. with stratagems which conflict with his conscience. the General Manager uses the Board as a way to secure the loyalty of his cronies. In many companies. Audit can be external but must be complemented internally. friends and family members by paying them hefty fees for their participation (and presumed contribution) in the meetings of the Board. as a separate functional entity which demands the undivided loyalty of its officers. The poor CFO is loyal to the management – not to the firm. It is the job of the CFO to provide the management with a real time tool which informs them what is happening in the firm and where are the problematic. he is forced to collaborate. The firm is nothing but a vehicle for self enrichment and does not exist in the Western sense.

Harder – because there is nothing like a stock exchange listing to impose discipline. corporate insecurity (will my company continue to exist in this horrible economic situation) and personal insecurity (will I continue to be the General Manager) combine to breed short-sightedness. interaction with regulators (a tedious affair) – all fall within the remit of the CFO. (4) To comply with all reporting. therefore. management-independent strategic thinking on a firm. Discipline and transparency require an enormous amount of investment by the financial structures of the firm: quarterly reports.It is important to emphasize that not all the businesses in developing countries are like that. disclosure of important business developments. transparency and long-term. Why. But geopolitical insecurity (what will be the future of developing countries in general and my country in particular). In some places the situation is much better and closer to the West. a drive to get rich while the going is good (and thus rob the company) – and up to criminal tendencies. speculative streaks. should he welcome it? 30 . audited annual financial statements. The absence of a functioning capital market in many developing countries and the inability of developing countries firms to access foreign capital markets – make the life of the CFO harder and easier at the same time. accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise listed. political insecurity (will my party remain in power).

(5) To prepare and present for the approval of the Board of Directors an annual budget. investment memoranda and all other financial and business documents as may be required from time to time by the Board of Directors of the firm. Privatized companies are dying slowly. other budgets. The laws were flawed. new expertise. Just think how much easier it is to maintain one set of books instead of two or to avoid conflicts with tax authorities on the one hand and your management on the other. feasibility studies. yet this is exactly the path that was chosen in numerous developing countries. Management takeovers and employee takeovers forced the new. they were unable to infuse the firm with new capital. Boards were composed of friends and cronies of the management because the managers also owned the firm – but they could be easily fired by their own workers. owners to rob the firm in order to pay for their shares. impoverished. 31 . Thus.Because discipline and transparency make the life of a CFO easier in the long run. or new management. who were also owners and so on. To mix the functions of management. workers and ownership is detrimental to a firm. business plans. These incestuous relationships introduced an incredible amount of insecurity into management ranks (see previous point). financial plans. The primal sin in developing countries was so called “privatization”. One of the problems thus wrought was the total confusion regarding the organic structure of the firm.

(7) To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by the firm. the banking system and other financial venues. underwriters and brokers. not all) are interested in collusion – not in consultancy. the accounting. The Board is meaningless. Communism (the common ownership of means of production) has returned in full vengeance. financial consultants. Many firms in developing countries (again. Absurdly. lacunas and problems whether actual or potential concerning the financial systems. lack of compliance. Having hired a consultant or the accountant – they believe that they own him. precisely because of the ostensibly most capitalist act of all. the audits. though in disguise. the budgets and any other matter of a financial nature or which could or does have a financial implication. 32 . the financial operations. The CFO is absolutely aligned and identified with the management. auditors. They are bitterly disappointed and enraged when they discover that an accountant has to comply with the rules of his trade or that a financial consultant protects his reputation by refusing to collaborate with shenanigans of the management. The concept of ownership is meaningless because everyone owns everything and there are no identifiable owners (except in a few companies). lack of adherence. privatization. including accountants. the financing plans.(6) To alert the Board of Directors and to warn it regarding any irregularity.

He must collaborate with the skewed practices and decision making processes of the banks – or perish. whether financial or other. 33 . conducive to the financial health. This also allows for favouritism and corruption in the banking sector. The financial institutions which pass for banks in developing countries lend money on the basis of personal acquaintance more than on the basis of analysis or rational decision making. (9) To fully computerize all the above activities in a combined hardware-software and communications system which integrates with the systems of other members of the group of companies. The lack of non-bank financing options and the general squeeze on liquidity make matters even worse for the finance manager. the growth prospects and the fulfillment of investment plans of the firm to the best of his ability and with the appropriate dedication of the time and efforts required. the attainment of its development plans and its investments. This "old boy network" substitutes for the orderly collection of data and credit rating of borrowers. "ineffective" or "no-good". A CFO who is unable to participate in these games is deemed by the management to be "weak". (10) Otherwise. One of the main functions of the CFO is to establish a personal relationship with the firm’s bankers. financial institutions and capital markets with the aim of securing the funds necessary for the operations of the firm. to initiate and engage in all manner of activities.(8) To maintain a working relationship and to develop additional relationships with banks.

that occupies the working time of Western CFOs. point 10. 34 . it is their brain that is valued – not their connections or cunning.It is this.

and generally.should not. That the wrong cash flow picture will distort the decisions of the management and lead to wrong (even to dangerous) decisions. That the management will highly leverage the company by assuming excessive debts burdening the cash flow of the company and / or b. c. these reports – which are normally provided to the General Manager . They are too detailed and. thus. a single day. be used by them at all. As things stand now.both on the single product level . However. disturbing financial data and other irregularities.Decision Support Systems By: Dr. a single supplier. He must be alerted to unusual happenings. This could lead to wrong decision making. That the company will pay excessive taxes on its earnings and / or d. in my view. Sam Vaknin Many companies in developing countries have a very detailed reporting system going down to the level of a single product. That the inventory will not be fully controlled and appraised centrally and / or e. tend to obscure the true picture. That a false Profit and Loss (PNL) picture will emerge . A General Manager must have a bird's eye view of his company. based on wrong data. the following phenomena could happen: a. 35 .

Put together. The second tier of financial audit and control is when the finance department (equipped with proper software – Solomon IV is the most widely used in the West) is able to produce pro forma financial statements monthly. or IAS). The budget allocates amounts of money to every activity and / or department of the firm.To assist in overcoming the above. As time passes. During the year. there are four levels of reporting and flows of data which every company should institute: The first level is the annual budget of the company which is really a business plan. the firm generates its financial statements: the income statement. however inaccurate. These financial statements. But the Manager should be able to open this computer daily and receive two kinds of data. the cash flow statement. they can not serve as day to day guides to the General Manager. fully updated and fully integrated: 1. provide a better sense of the dynamics of the operation and should be constructed on the basis of Western accounting principles (GAAP and FASBs. Daily financial statements 2. 36 . or at the end of the fiscal year. the actual expenditures are compared to the budget in a feedback loop. Daily ratios report. these four documents are the formal edifice of the firm's finances. However. the balance sheet.

and a balance sheet. at each and every stage. but its future situation. while traveling. These pro forma financial statements should include all the future flows of money . cash flow.whether invoiced or not. In other words.as opposed to the theoretical cash situation which includes accounts payable and account receivable in the form of expenses and income. 37 . Using today's technology . what his real cash situation is . from home. the Manager will be able to type a future date into his computer and get the financial reports and statements relating to that date. fully analysed and fully updated. This way. The manager should be able to know. the Manager will not be able to see only a present situation of his company. The most important statement is that of the cash flow. and so on.The daily financial statements The Manager should have access to continuously updated statements of income.a wireless-connected laptop – managers are able to access all these data from anywhere in the world.

other firms in his branch and to the overall performance of the industry that he is operating in. spot the alerts. or where the ratios warn about problems in the future – management intervention may be required.The daily ratios report This is the most important part of the decision support system. 38 . It allows him to compare the behaviour of these parameters to historical data and to simulate the future functioning of his company under different scenarios. the Manager will only have to look at four computer screens in the morning. Instead of sifting through mountains of documents. read the explanations offered by the software.. check what is happening and better prepare himself for the future. It also allows him to compare the performance of his company to the performance of his competitors. The Manager can review these financial and production ratios. It enables the Manager to instantly analyse dozens of important aspects of the functioning of his company. Where there is a strong deviation from historical patterns.

the profit margin on the sales g. It has been proven that without proper feedback. for how long (for which maturities) and in which interest rate. 39 . Sales to fixed assets ratios k. It warns the management against impending crises and problems in the company. Valuation price ratios and many others.the return on the adjusted equity capital c. Debt to equity ratios d.asset turnover. ROE . how efficiently assets are used h.Examples of the ratios to be included in the decision system a. Inventory turnover ratios l. The management knows exactly how much credit it could take. quick ratio.the return on the assets e. The financial average f. ROA . The effects of using a decision system A decision system has great impact on the profits of the company. SUE measure . It forces the management to rationalize the depreciation. It specially helps in following areas: a. Tax burden and interest burden ratios i. ATO . inventory and inflation policies. Current ratio.deviation of actual profits from expected profits b. Compounded leverage j. managers tend to take too much credit and burden the cash flow of their companies. Days receivable and days payable m. interest coverage ratio and other liquidity and coverage ratios n. ROS .

40 . The decision system is an integral part of financial management in the West.000 USD (all included: software. So. and training). hardware. non cash outlays are controlled.b. They are one of the best investments that a firm can make. tax liabilities are minimized and cash flows are maintained positive throughout. the establishment of a decision system does not hinder the functioning of the company in any way and does not interfere with the authority and functioning of the financial department. As a result of all the above effects the value of the company grows and its shares appreciate. 4. Decision Support Systems cost as little as 20. c. Profits go up. It is completely compatible with western accounting methods and derives all the data that it needs from information extant in the company. A decision system allows for careful financial planning and tax planning.

Is privatization really the robbery in disguise of state assets by a select few.On Volatility and Risk The debate rages all over Eastern and Central Europe. The stock market reacts with frenzily it crashes. Greenspan testifies in the Senate.Valuing Stocks By: Dr. Fundamental Analysis The Roller Coaster Market .Technical vs. determines the value of companies. Willing buyers and willing sellers meet there to freely negotiate deals of stock purchases and sales.and so were privatizers in developing countries. Why? 41 . What price should state-owned companies have fetched? This question is not as simple and straightforward as it sounds. New information. Sam Vaknin Also Read The Myth of the Earnings Yield The Friendly Trend . There is a stock pricing mechanism known as the Stock Exchange. economic figures are released . It raged in Britain during the 80s. cronies of the political regime? Margaret Thatcher was accused of it . macro-economic and micro-economic. in countries in transition as well as in Western Europe.and the rumour mill starts working: interest rates might go up.

A top executive is asked how profitable will his firm be this quarter. 42 . probably the result of different sensitivities to changes in interest rates and in earnings estimates. The former models are applicable mostly to companies whose shares are traded publicly. A few models have been developed and are in wide use but it is difficult to say that any of them has real predictive or even explanatory powers. Some of these models are "technical" in nature: they ignore the fundamentals of the company. fears and attitudes will be reflected in the prices immediately. Others are fundamental: these models rely on the company's performance and assets. The share price surges: no one wants to sell it. He winks. Why? Moreover: the share price of a company of an identical size. Such models assume that all the relevant information is already incorporated in the price of the stock and that changes in expectations. similar financial ratios (and in the same industry) barely budges. in stock exchanges. They are not very useful in trying to attach a value to the stock of a private firm. The latter type (fundamental) models can be applied more broadly. everyone want to buy it. hopes. The result: a sharp rise in its price. The question remains: Why do the shares of similar companies react differently? Economy is a branch of psychology and wherever and whenever humans are involved. But this is just to rename the problem. he grins .this is interpreted by Wall Street to mean that profits will go up. Why not? We say that the stocks of the two companies have different elasticity (their prices move up and down differently). answers don't come easy.

or the risk that we will never receive them. In certain places. But the discount rate depends on the inflation rate in the country where the firm is located (or. The discounting reflects the fact that money received in the future has lower (discounted) purchasing power than money received now. of course. on the projected supply of and demand for its shares and on the aforementioned risk of non-payment. real estate.The value of a stock (a bond. 43 . a firm. the value of the stock. the cash flows expected in the future and the discount (interest) rates. in all the countries where it operates). Put differently: the discount reflects the loss in purchasing power of money deferred or the interest lost by not being able to invest the money right away. The rate that we use to discount future cash flows is the prevailing interest rate. additional factors must be taken into account (for example: country risk or foreign exchange risks). the higher the risk. This is partly true in stable. if a multinational. Another problem is the uncertainty of future payments. Moreover. discounted at the appropriate rate. This is the time value of money. predictable and certain economies. A model exists which links time. we can invest money received now and get interest on it (which should normally equal the discount). or any asset) is the sum of the income (cash flow) that a reasonable investor would expect to get in the future. The longer the payment period.

A stock's Beta can be obtained by calculating the coefficient of the regression line between the weekly returns of the stock and those of the stock market during a selected period of time. Liquidity means how freely can one buy and sell it and at which quantities sought or sold do prices become rigid. Beta is a measure of the volatility of the return of the stock relative to that of the return of the market. the interest payable on government bonds). Example: if a controlling stake is sold . the other being the risk-related rate (the rate which reflects the risk related to the specific stock). to a lesser extent. the discount rate is the risk-free rate plus a coefficient (called beta) multiplied by a risk premium general to all stocks (in the USA it was calculated to be 5.The supply of a stock and. the discount rate is comprised of two elements: one is the risk-free rate (normally. According to it. as a result.the buyer normally pays a "control premium".5%). Another example: in thin markets it is easier to manipulate the price of a stock by artificially increasing the demand or decreasing the supply ("cornering" the market). But what is this risk-related rate? The most widely used model to evaluate specific risks is the Capital Asset Pricing Model (CAPM). 44 . the demand for it determine its distribution (how many shareowners are there) and. In a liquid market (no problems to buy and to sell). its liquidity.

they tend to have a high and unstable dividend growth rate (the DDM tackles this adequately). suitable for the treatment of Growth Models. Other models relate to the projected growth of the company (which is supposed to increase the payable dividends and to cause the stock to appreciate in value). Professionals resort to sensitivity tests which neutralize the changes that betas undergo with time. it is expected to have a lower and stable growth rate. Dividend Discount Models (DDM) were developed. Still. as input. low dividend growth. on dividends and on growth. with all its shortcomings and disputed assumptions. Two-stage models are more powerful because they combine both emphases. At first. The only relatively certain cash flows are dividends paid to the shareholders. the CAPM should be used to determine the discount rate. Another problem is that betas change with every new datum. DDM’s require. the ultimate value of the stock and growth models are only suitable for mature firms with a stable. But to use the discount rate we must have future cash flows to discount.Unfortunately. As the firm matures. Still. So. 45 . different betas can be calculated by selecting different parameters (for instance. the length of the period on which the calculation is performed). This is because of the life-cycle of firms.

is there any guarantee that it will continue to be so in the next year. dividends are not the only future incomes you would expect to get.who can guarantee that its dividend policy will not change and that the same rate of dividends will continue to be distributed? The number of periods (normally. or the next decade? If it does continue to be profitable . 46 . others do not. If the company is in the public domain. the country (stable or geopolitically perilous). In telecommunications. It depends on the industry (growth or dying). in particular the free cash flow that goes to the shareholders. on the management in place (committed or mobile). the number can shoot up to 20 times net earnings. While some companies pay dividends (some even borrow to do so).But how many years of future income (from dividends) should we use in our calculations? If a firm is profitable now. So in stock valuation. for instance. the range of numbers used for valuing stocks of a private firm is between 7 and 10. The multiple denotes by how much we multiply the (after tax) earnings of the firm to obtain its value. Capital gains (profits which are the result of the appreciation in the value of the stock) also count. on the product (new or old technology) and a myriad of other factors. This is the result of expectations regarding the firm's free cash flow. It is almost impossible to objectively quantify or formulate this process of analysis and decision making. years) selected for the calculation is called the "price to earnings (P/E) multiple". on the ownership structure (family or public).

Because "free" cash flow can be easily extracted from these reports. Cash Flow Statements have become a standard accounting requirement in the 80s (starting with the USA).Total Current Liabilities Change in Working Capital = One Year's Working Capital MINUS Previous Year's Working Capital 47 . export-orientated firms. it is the cash which a firm has after sufficiently investing in its development.There is no agreement as to what constitutes free cash flow. research and (predetermined) growth. The free cash flow of a firm that is debt-financed solely by its shareholders belongs solely to them. stock valuation based on free cash flow became increasingly popular and feasible. In general. Cash flow statements are considered independent of the idiosyncratic parameters of different international environments and therefore applicable to multinationals or to national. Free cash flow to equity (FCFE) is: FCFE = Operating Cash Flow MINUS Cash needed for meeting growth targets Where Operating Cash Flow = Net Income (NI) PLUS Depreciation and Amortization Cash needed for meeting growth targets = Capital Expenditures + Change in Working Capital Working Capital = Total Current Assets .

The complete formula is: FCFE = Net Income PLUS Depreciation and Amortization MINUS Capital Expenditures PLUS Change in Working Capital. A leveraged firm that borrowed money from other sources (even from preferred stock holders) exhibits a different free cash flow to equity. The FCFE of a leveraged firm is: FCFE = Net Income PLUS Depreciation and Amortization MINUS Principal Repayment of Debt MINUS Preferred Dividends PLUS Proceeds from New Debt and Preferred MINUS Capital Expenditures MINUS Changes in Working Capital. 48 . If its borrowings are sufficient to pay the dividends to the holders of preference shares and to service its debt . Its CFCE must be adjusted to reflect the preferred dividends and principal repayments of debt (MINUS sign) and the proceeds from new debt and preferred stocks (PLUS sign).its debt to capital ratio is sound.

49 .A sound debt ratio means: FCFE = Net Income MINUS (1 .Debt Ratio)*(Capital Expenditures MINUS Depreciation and Amortization PLUS Change in Working Capital).

It means. But a business plan is the equivalent of a visit card. All the documents of the firm are assembled and reviewed. answers questions. more serious. essentially. makes presentations and serves as a coordinator when the DD teams wish to interview people connected to the firm. Only one person represents the company. The firm must have ONE VOICE. it is very similar to an audit. This person interfaces with all outside due diligence teams. The introduction is very important . once the foreign investor has expressed interest. First Rule: The firm must appoint ONE due diligence coordinator.but. more onerous and more tedious process commences: Due Diligence. Sam Vaknin A business which wants to attract foreign investments must present a business plan.The Process of Due Diligence By: Dr. He collects all the materials requested and oversees all the activities which make up the due diligence process. lawyers and accountants descends on the firm to analyze it. 50 . to make sure that all the facts regarding the firm are available and have been independently verified. a second. In some respects. the management is interviewed and a team of financial experts. "Due Diligence" is a legal term (borrowed from the securities industry).

Controls. who are the investors. Give them the big picture. legal (licences) and competitive environment A vision of the business in the future Products and services and their uses Comparison of the firm's products and services to those of the competitors Warranties. Financial. The Marketing Plan Must include the following elements: • • • • • • • • • • A brief history of the business (to show its track performance and growth) Points regarding the political. They must be instructed not to lie. It is confined both in time and in subjects: Legal. The DD is a process which is more structured than the preparation of a Business Plan. Both employees and management must realize that this is a top priority. They must know the DD coordinator and the company's spokesman in the DD process. Marketing. Why is the company raising funds. how will the future of the firm (and their personal future) look if the investor comes in. guarantees and after-sales service Development of new products or services A general overview of the market and market segmentation Is the market rising or falling (the trend: past and future) What customer needs do the products / services satisfy 51 .Second Rule: Brief your workers. Technical.

Marketing and advertising campaigns (including cost estimates) . shipping. special offers. dealerships.) Customer loyalty (example: churn rate and how is it monitored and controlled). support. upgrades. training of the sales personnel. sales targets. invoicing. sales-related incentives. complaints. the clients and the competitors Planned market research A sales forecast by product group The pricing strategy (how is pricing decided) Promotion of the sales of the products (including a description of the sales force. maintenance. Attach a flow chart of the purchasing process from the moment that the client is approached by the sales force until he buys the product. 52 . Customer after-sales service (hotline.• • • • • • • • • • • • • • Which markets segments do we concentrate on and why What factors are important in the customer's decision to buy (or not to buy) A list of the direct competitors and a short description of each The strengths and weaknesses of the competitors relative to the firm Missing information regarding the markets.broken by market and by media Distribution of the products A flow chart describing the receipt of orders. telemarketing and sales support). etc.

in accordance with FASB) Cash Flow Projections and the assumptions underlying them 53 .Legal Details • • • • • • • • • • Full name of the firm Ownership of the firm Court registration documents Copies of all protocols of the Board of Directors and the General Assembly of Shareholders Signatory rights backed by the appropriate decisions The charter (statute) of the firm and other incorporation documents Copies of licences granted to the firm A legal opinion regarding the above licences A list of lawsuit that were filed against the firm and that the firm filed against third parties (litigation) plus a list of disputes which are likely to reach the courts Legal opinions regarding the possible outcomes of all the lawsuits and disputes including their potential influence on the firm Financial Due Diligence • • • • • • Last 3 years income statements of the firm or of constituents of the firm. The statements have to include: Balance Sheets Income Statements Cash Flow statements Audit reports (preferably done according to the International Accounting Standards. or. if the firm is the result of a merger. if the firm is looking to raise money in the USA.

communications. services (including offers) Manpower (skilled and unskilled) Infrastructure (power. other) Need for know-how. etc. special arrangements 54 . transmitters) Raw materials: sources. cost and quality Relations with suppliers and support industries Import restrictions or licensing (where applicable) Sites. references. technological transfer and licensing required Suppliers of equipment.) Transport and communications (example: satellites. receivers. water. software. balances Technical Plan • • • • • • • • • • • • Description of manufacturing processes (hardware. lines. filing.Controls • • • • • • • • • • • • Accounting systems used Methods to price products and services Payment terms. technical specification Environmental issues and how they are addressed Leases. archives Cost accounting system Budgeting and budget monitoring and controls Internal audits (frequency and procedures) External audits (frequency and procedures) The banks that the firm is working with: history. collections of debts and ageing of receivables Introduction of international accounting standards Monitoring of sales Monitoring of orders and shipments Keeping of records. software.

This is a process much more serious and important than the preparation of the Business Plan.) A successful due diligence is the key to an eventual investment. etc. 55 .• Integration of new operations into existing ones (protocols.

As knowledge increased and specialization ensued – it was no longer feasible or possible to micro-manage a firm one invested in. Sam Vaknin In the not so distant past. clientele and a vision. A single investor (or a small group of investors) could no longer accommodate the needs even of a single firm. Strategic Investor By: Dr. Thus. Investors of all colors sought to safeguard their investment by taking over as many management functions as they could. As markets grew. intellectual property. A manager was expected to manage. A firm resembled a household and the number of people involved – in ownership and in management – was correspondingly limited. Actually. a sense of direction.Financial Investor. The other type supplied them with know-how. marketing techniques. Additionally. the scales of industrial production (and of service provision) expanded. management skills. separate businesses of money making and business management emerged. not to be capable of personally tackling the various and varying tasks of the business that he managed. there was little difference between financial and strategic investors. investments were small and shareholders few. 56 . two classes of investors emerged. One type supplied firms with capital. technology. People invested in industries they were acquainted with first hand. An investor was expected to excel in obtaining high yields on his capital – not in industrial management or in marketing.

in many cases. Optimally. The financial investor has little interest in the company's management. But. But his interpretation of the rolls and functions of "good management" are very different to that offered by the strategic investor.right and wrong .decisions. The financial investor represents the past. The price of his shares is the most important indication of success. Its orientation is short term: an "exit strategy" is sought as soon as feasible. Venture capital and risk capital funds. so is macro-management. more and more. So are. The financial investor is always on the lookout. This is "bottom line" short termism which also characterizes operators in the capital markets. to a growing extent. searching for willing buyers for his stake.In many cases. 57 . For “exit strategy” read quick profits. The financial investor participates in quarterly or annual general shareholders meetings. the financial investor has no interest. but also a good management. for instance. The financial investor is satisfied with a management team which maximizes value. his money buys for him not only a good product and a good market. Micro-management is left to others but. nor the resources to get seriously involved in any one of them. a separation was maintained. Its money is the result of past . The stock exchange is a popular exit strategy. Invested in so many ventures and companies. This is the extent of its involvement. investment banks and other financial institutions. the strategic investor also provided the necessary funding. are purely financial investors.

the balance between financial investors and strategic investors is shifting in favour of the latter.all depend on the strategic investor. These are the functions normally reserved to financial investors: Financial Management The financial investor is expected to take over the financial management of the firm and to directly appoint the senior management and. The strategic investor represents a discounted future in the same manner that shares do.The strategic investor. the management echelons. represents the real long term accumulator of value. which directly deal with the finances of the firm. The quality of management. the rate of the introduction of new products. Paradoxically. Given the ability to create a brand. especially.money is abundant. People understand that money is abundant and what is in short supply is good management. Indeed. it is the strategic investor that has the greater influence on the value of the company's shares. on the other hand. That there is a strong relationship between the quality and decisions of the strategic investor and the share price is small wonder. 58 . the level of customer satisfaction. gradually. to issue new products and to acquire new clients . the education of the workforce . the success or failure of marketing strategies. to generate profits.

the adherence to the budget. regularly and duly prepare and present to the Board of Directors financial statements and reports as required by all pertinent laws and regulations in the territories of the operations of the firm and as deemed necessary and demanded from time to time by the Board of Directors of the Firm. the cost of sales and other budgetary items. the expenditures. 3. To regulate. as financial management is implemented. To comply with all reporting. This is usually achieved both during a Due Diligence process and later. accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the firm are traded or are about to be traded or otherwise listed. supervise and implement a timely. 59 .1. full and accurate set of accounting books of the firm reflecting all its activities in a manner commensurate with the relevant legislation and regulation in the territories of operations of the firm and with internal guidelines set from time to time by the Board of Directors of the firm. its flow of funds. To implement continuous financial audit and control systems to monitor the performance of the firm. 2. the income. 4. To timely.

including accountants. 8. To maintain a working relationship and to develop additional relationships with banks. the budgets and any other matter of a financial nature or which could or does have a financial implication. underwriters and brokers. lack of compliance. the financial operations. investment memoranda and all other financial and business documents as may be required from time to time by the Board of Directors of the Firm. financial consultants. feasibility studies.5. financial plans. To prepare and present for the approval of the Board of Directors an annual budget. the banking system and other financial venues. the audits. lack of adherence. the accounting. 9. business plans. auditors. 60 . To alert the Board of Directors and to warn it regarding any irregularity. the attainment of its development plans and its investments. financial institutions and capital markets with the aim of securing the funds necessary for the operations of the firm. To fully computerize all the above activities in a combined hardware-software and communications system which will integrate into the systems of other members of the group of companies. To collaborate and coordinate the activities of outside suppliers of financial services hired or contracted by the firm. other budgets. lacunas and problems whether actual or potential concerning the financial systems. the financing plans. 6. 7.

10. Otherwise, to initiate and engage in all manner of activities, whether financial or of other nature, conducive to the financial health, the growth prospects and the fulfillment of investment plans of the firm to the best of his ability and with the appropriate dedication of the time and efforts required. Collection and Credit Assessment 1. To construct and implement credit risk assessment tools, questionnaires, quantitative methods, data gathering methods and venues in order to properly evaluate and predict the credit risk rating of a client, distributor, or supplier. 2. To constantly monitor and analyse the payment morale, regularity, non-payment and nonperformance events, etc. – in order to determine the changes in the credit risk rating of said factors. 3. To analyse receivables and collectibles on a regular and timely basis. 4. To improve the collection methods in order to reduce the amounts of arrears and overdue payments, or the average period of such arrears and overdue payments. 5. To collaborate with legal institutions, law enforcement agencies and private collection firms in assuring the timely flow and payment of all due payments, arrears and overdue payments and other collectibles.

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6. To coordinate an educational campaign to ensure the voluntary collaboration of the clients, distributors and other debtors in the timely and orderly payment of their dues. The strategic investor is, usually, put in charge of the following: Project Planning and Project Management The strategic investor is uniquely positioned to plan the technical side of the project and to implement it. He is, therefore, put in charge of: The selection of infrastructure, equipment, raw materials, industrial processes, etc. Negotiations and agreements with providers and suppliers Minimizing the costs of infrastructure by deploying proprietary components and planning The provision of corporate guarantees and letters of comfort to suppliers The planning and erecting of the various sites, structures, buildings, premises, factories, etc. The planning and implementation of line connections, computer network connections, protocols, solving issues of compatibility (hardware and software, etc.) Project planning, implementation and supervision

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Marketing and Sales 1. The presentation to the Board an annual plan of sales and marketing including: market penetration targets, profiles of potential social and economic categories of clients, sales promotion methods, advertising campaigns, image, public relations and other media campaigns. The strategic investor also implements these plans or supervises their implementation. 2. The strategic investor is usually possessed of a brandname recognized in many countries. It is the market leaders in certain territories. It has been providing goods and services to users for a long period of time, reliably. This is an important asset, which, if properly used, can attract users. The enhancement of the brandname, its recognition and market awareness, market penetration, cobranding, collaboration with other suppliers – are all the responsibilities of the strategic investor. 3. The dissemination of the product as a preferred choice among vendors, distributors, individual users and businesses in the territory. 4. Special events, sponsorships, collaboration with businesses. 5. The planning and implementation of incentive systems (e.g., points, vouchers).

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pecuniary and quality supervision. new marketing ploys. sounds. pricing. The strategic investor typically brings to the firm valuable experience in marketing and sales. articles. network control. a franchising network. advertising. It has built large databases with multi-year profiles of the purchasing patterns and demographic data related to thousands of clients in many countries. 7. images. It developed software and personnel capable of analysing any market into effective niches and of creating the right media (image and PR). paper clippings. advertising and sales promotion drives best suited for it. It owns libraries of material. predicting the future trends and market needs.6. It has numerous off the shelf marketing plans and drawer sales promotion campaigns. The strategic investor usually organizes a distribution and dealership network. etc. or a sales network (retail chains) including: training. it accumulated years of marketing and sales promotion ideas which crystallized into a new conception of the business. local marketing and sales promotion and other network management functions. PR and image materials. new market niches. inventory and accounting controls. Above all. and proprietary trademarks and brand names. market analyses and research. 64 . The strategic investor is also in charge of "vision thinking": new methods of operation.

implement and supervise all the stages of the technological side of the business. 3. The planning and implementation of a fully operative computer system (hardware. in collaboration with other suppliers or market technological leaders.Technology 1. The strategic investor puts at the disposal of the firm proprietary software developed by it and specifically tailored to the needs of companies operating in the firm's market. proprietary. The training is conducted at its sole expense and includes tours of its facilities abroad. The planning and the execution of an integration program with new technologies in the field. Education and Training The strategic investor is responsible to train all the personnel in the firm: operators. vendors. communication. software. 2. The planning and implementation of new technological systems up to their fully operational phase. distributors. intranet) to deal with all the aspects of the structure and the operation of the firm. technological solutions to the needs of the firm. 4. The encouragement of the development of inhouse. sales personnel. customer services. its clients and suppliers. 65 . The strategic partner's engineers are available to plan.

most conducive to the conduct of its business and to present the new structure for the Board's approval within 30 days from the date of the GM's appointment. They may be less visionary – but also more experienced. 3. To oversee the personnel of the firm and to resolve all the personnel issues. 2. representations and negotiations with other firms. 66 . in the first place – are usually left with the following functions: Administration and Control 1. To structure the firm in an optimal manner. 4.The entrepreneurs – who sought to introduce the two types of investors. Entrepreneurs are excellent at identifying the needs of the market and at introducing technological or service solutions to satisfy such needs. Outside investors are not emotionally involved. To represent the firm in its contacts. 5. authorities. Only the introduction of outside investors can resolve the dilemma. To run the day to day business of the firm. This is why entrepreneurs find it very hard to cohabitate with investors of any kind. To secure the unobstructed flow of relevant information and the protection of confidential organization. or persons. But the very personality traits which qualify them to become entrepreneurs – also hinder the future development of their firms.

This is where nine out of ten entrepreneurs fail . mean spirited. And – being well acquainted with entrepreneurs – they insist on having unmitigated control of the business.They are more interested in business results than in dreams. corporate predators. They feel that they are losing their creation to cold-hearted. for fear of losing all their money.in knowing when to let go. These things antagonize the entrepreneurs. They rebel and prefer to remain small or even to close shop than to give up their cherished freedoms. 67 .

out of pocket – NOT received from the Banks. The Buyers of residential property form an Association. The Buyers’ Association signs a contract with a construction company chosen by open and public tender. The contract with the construction company is for the construction of residential property to be owned by the Buyers. Sam Vaknin THE BUYERS 1. 68 . The Buyers secure financing from the Bank (see below). 5. 3. The Buyers Association together with the Banks appoints supervisors to oversee the work done by the construction company: its quality and adherence to schedule. This money is the Buyers’ own funds. 2. 4. 6.Mortgage Backed Construction By: Dr. The Buyers then pay the construction company 25% of the final value of the property to be constructed in advance (=Buyer’s Equity).

It is registered in the Registrar of Mortgages and the Courts. This guarantee can be used ONLY AFTER the banks have exhausted all other legal means of materializing a collateral or seizing the assets of a delinquent debtor in default. The mortgage loan covers a maximum of 75% of the final value of the property to be constructed according to appraisals by experts. This lien is an inseparable part of the mortgage (loan) contract each and every buyer signs. The money lent to the Buyers (=the mortgages) REMAINS in the bank. the commercial banks issue 10 years mortgages (=lend money with a repayment period of 120 months) to the private Buyers of residential property. A lien in favour of the bank is placed on the land and property on it – to be built using the Bank’s money and the Buyers’ equity. It is NOT be given to the Buyers. 2. 5. 3. Each Buyer pledges only HIS part of the property (for instance. The government provides a last resort guarantee to the commercial banks. 69 . 4.THE BANKS 1. Against this guarantee. ONLY the apartment being constructed for HIM).

The construction companies use the advance of 25% to start the construction of the residential property – to buy the land. lay the foundations and start the skeleton. 6. the Bank releases the next tranche (lot) of financing to the Buyers.THE CONSTRUCTION COMPANY 1. 3. When the advance-money is finished. When the construction is finished – the funds should be completely exhausted (=used). The funds that the Buyers borrowed from the Banks are released in a few tranches according to the progress of the construction work. 5. 2. 70 . If everything is according to contract. The Buyers then approach the Bank for additional money to be taken from the mortgage loans deposited at the Bank (=the money that the Bank lent the Buyers). The Banks have a lien of the property. The Bank verifies that the construction is progressing according to schedule and according to quality standards set in the construction contract. who then forward it to the construction firm. as per above. All the property belongs to the BUYERS and is registered solely to their names. 4. the construction company notifies the BUYERS.

71 .WHEN THE CONSTRUCTION IS FINISHED 1. The Buyers can sell the apartment only with the agreement of the Bank – or if they pre-pay the remaining balance of the mortgage loan to the Bank. As long as the mortgage loan is not fully paid – the lien on the property in favour of the Bank remains. 4. The Buyers can move into the apartments. 3. The Buyers can rent the apartment. The construction company will have received 100% of the price agreed in the contract. WHILE THE MORTGAGE LOAN IS BEING REPAID… 1. It is lifted (=cancelled) once the mortgage loan and the interest and charges thereof has been fully repaid by the Buyers. 2. The Buyers go on repaying the mortgage loans to the Banks. 2. The Buyers can live in the apartment. 3.

72 . The Banks can securitize the mortgage pool and sell units or mortgage backed bonds to the public. This means that the Banks can sell to the public passthrough certificates . This way the Banks can replenish their capital stock and re-enter the mortgage market.securities backed by an underlying pool of mortgages of various maturities and interest rates.4.

He holds two honorary doctorates for his work on identifying and dealing with bullying. Q: What is workplace bullying? A: Workplace bullying is persistent. Turning his experience to good use he set up the UK National Workplace Bullying Advice Line in 1996 and his web site Bully Online in 1997 since which time he has worked on over 5000 cases worldwide.Bully at Work Interview with Tim Field By: Dr. Sam Vaknin Also published by United Press International (UPI) In 1994 Tim Field was bullied out of his job as a Customer Services Manager which resulted in a stress breakdown. maintaining strict supervision. Q: How is it different to adopting disciplinarian measures. intrusive behaviour of one or more individuals whose actions prevent others from fulfilling their duties. He is the Webmaster of Bully Online. He now lectures widely as well as writing and publishing books on bullying and psychiatric injury. or oversight? 73 . unwelcome.

bullies crave attention and become resentful when others get more attention for their competence and achievements than themselves. What varies is the focus for expression of the behavior. Bullies focus on competence and popularity which at present are not covered by employment legislation. I believe. Being emotionally immature. discrimination. professional codes of conduct and health and safety practices. Bullies project their inadequacies onto others to distract and divert attention away from the inadequacies. For instance. a harasser or discriminator focuses on race or gender or disability. discrimination.A: The purpose of bullying is to hide the inadequacy of the bully and has nothing to do with "management" or the achievement of tasks. 74 . The bullying that one sees is often also the tip of an iceberg of wrongdoing which may include misappropriation of budgets. stalking and abuse. Q: Should it be distinguished from harassment (including sexual harassment). the bully is a serial bully who has a history of conflict with staff. the underlying behavior and thus the common denominator of harassment. or stalking? A: Bullying is. In most cases of workplace bullying reported to the UK National Workplace Bullying Advice Line. as well as breaches of rules. harassment. regulations. Bullies seethe with resentment and anger and the conduits for release of this inner anger are jealousy and envy which explains why bullies pick on employees who are good at their job and popular with people.

the target of bullying is eliminated through forced resignation. Statistics from the UK National Workplace Bullying Advice Line reveal that around 20% of cases are from the education sector. Sometimes another target is selected before the current target is eliminated. Q: Can you provide us with some statistics? How often does bullying occur? How many people are affected? A: Surveys of bullying in the UK indicate that between 12-50% of the workforce experience bullying. the bully selects another target and the cycle restarts. and around 6% from the voluntary / charity / notfor-profit sector. 75 .Q: What is the profile of the typical bully? A: Over 90% of the cases reported to the UK National Workplace Bullying Advice Line involve a serial bully who can be recognised by their behaviour profile which includes compulsive lying. an arrested level of emotional development. an unusually high verbal facility. a Jekyll and Hyde nature. 10% are from social services. and a compulsive need to control. After a short interval of between 2-14 days. 12% are from healthcare. unfair dismissal.health retirement whilst the bully is promoted. preferring instead to remain within the realms of psychological violence and non-arrestable offences. The serial bully rarely commits a physical assault or an arrestable offence. charm and a considerable capacity to deceive. or early or ill. Q: What are bullying's typical outcomes? A: In the majority of cases.

employees. the government. and suicide. reactive depression. chronic fatigue. the courts. and the cost of stress to UK plc is thought to be between £5-12 billion (US$7-17 billion). Australia and Ireland) show similar patterns with the caring professions topping the list of bullied workers. Canada.After that. The effects on health include. police. Employers do not account for the cost of bullying and its consequences. Enquiries from outside the UK (notably USA. equivalent to around £1. a climate of fear. etc. Q: Could you estimate the economic effects of workplace bullying . amongst other things. damage to the immune system. law enforcement agencies. 76 . Employees have to work twice as hard to overcome the serial bully's inefficiency and dysfunction which can spread through an organisation like a cancer. When all the direct. Because of its subtle nature. postal workers and other government employees featuring prominently. the cost to UK plc (taxpayers and shareholders) could be in excess of £30 billion (US$44 billion).costs to employers (firms).000 hidden tax per working adult per year. calls come from all sectors both public and private. and high levels of insecurity. media. lack of support. indirect and consequential costs of bullying are taken into account. bullying can be difficult to recognise. therefore the figures never appear on balance sheets. but the consequences are easy to spot: excessive workloads.? A: Bullying is one of the major causes of stress. with finance.

77 . administration. Each of these incur consequential costs of staff cover. The study also suggested that in the UK 52% of all working time is spent unproductively compared to the European average of 43%. Absenteeism alone costs UK plc over £10 billion a year and stress is now officially the number one cause of sickness absence having taken over from the common cold. bad management (often a euphemism for bullying) accounted for the biggest slice of unproductive days with low morale accounting for 17%. However. instead preferring to see it as skiving and malingering. The main stress factors were having too much work and not being supported by managers.The indirect costs of bullying include higher-than average staff turnover and sickness absence. In November 2001 a study by Proudfoot Consulting revealed the cost of bad management. At 65%.5m) reported feeling extremely stressed at work. low employee morale and poorly-trained staff to British business at 117 lost working days a year. surveys suggest that at least 20% of employers still do not regard stress as a health and safety issue. loss of production and reduced productivity which are rarely recognised and even more rarely attributed to their cause. The Bristol Stress and Health at Work Study published by the HSE in June 2000 revealed that 1 in 5 UK workers (around 5.

Bullying is not just "something children do in the playground".aware of the problem and its magnitude? Are educational campaign effective? Did anti-bullying laws prove effective? A: Most bullying is hierarchical and can be traced to the top or near the top. Awareness of bullying. Q: What can be done to reduce workplace bullying? Are firms. The cost to UK plc of lost work days due to lack of engagement was estimated to be between £39-48 billion a year. Only Sweden has a law which specifically addresses bullying. law enforcement agencies. Whilst the law is not a solution. bullies feel free to bully. sexual harassment. and especially its seriousness. denial is the most common strategy employed by toxic managements. the presence of a law is an indication that society has made a judgement that the behaviour is no longer acceptable. The survey also found that the longer an employee stayed. The most common response to questions such as "how engaged are your employees?" and "how effective is your leadership and management style?" and "how well are you capitalising on the talents. 78 . Where no law exists. the government.The results of a three-year survey of British workers by the Gallup Organization published in October 2001 revealed that many employers are not getting the best from their employees. is still low throughout society. the courts . skills and knowledge of your people?" was an overwhelming "not very much". the less engaged they became. and rape. it's a lifetime behaviour on the same level as domestic violence. As bullying is often the visible tip of an iceberg of wrongdoing.

Bullying is a form of psychological and emotional rape because of its intrusive and violational nature. 79 .

how can we tell if our money is safely tucked away in a safe haven? The reflex is to go to the bank's balance sheets. Despite a very chequered history of mismanagement. We rarely entrust our money to anyone but ourselves – and our banks. Sam Vaknin Banks are institutions where miracles happen regularly. The surprising thing is that – despite common opinion – it does. The implicit guarantees of the state and of other financial institutions move us to take risks which we would. real estate complexes all serve to enhance the image of the banks as the temples of the new religion of money.Is my Money Safe? On the Soundness of Our Banks By: Dr. Banks and balance sheets have been both invented in their modern form in the 15th century. Glossy brochures. The fashionable term today is "moral hazard". shrine-like. corruption. Partly it is the feeling that there is safety in numbers. Partly it is the sophistication of the banks in marketing and promoting themselves and their products. But what is behind all this? How can we judge the soundness of our banks? In other words. A balance sheet. coupled with other financial statements is supposed to provide us with a true and full picture of the health of the bank. professional computer and video presentations and vast. false promises and representations. delusions and behavioural inconsistency – banks still succeed to motivate us to give them our money. have avoided. otherwise. its past and its long-term prospects. 80 .

Sometimes they conform to Western accounting standards (the Generally Accepted Accounting Principles. Another one is Moody’s. Otherwise. which make their updated financial reports available to you. These agencies assign letter and number combinations to the banks that reflect their stability. is to step up to the bank manager.But it is rather useless unless you know how to read it. which often leave a lot to be desired. Financial statements (Income – or Profit and Loss Statement. Most agencies differentiate the short term from the long term prospects of the banking institution rated. Banks are rated by independent agencies. 81 . Unfortunately. Still. muster courage and ask for the bank's rating. Ostensibly. they conform to local accounting standards. Cash Flow Statement and Balance Sheet) come in many forms. therefore. such as the legality of the operations of the bank (legal rating). A lot often hides in those corners of corporate holdings. GAAP. life is more complicated than rating agencies would have us believe. or the less rigorous and more fuzzily worded International Accounting Standards. Such audited financial statements should consolidate the financial results of the bank with the financial results of its subsidiaries or associated companies. all a concerned person has to do. Some of them even study (and rate) issues. you should look for banks. The best choice would be a bank that is audited by one of the Big Four Western accounting firms and makes its audit reports publicly available. IAS). The most famous and most reliable of the lot is Fitch Ratings.

In 1996.They base themselves mostly on the financial results of the bank rated as a reliable gauge of its financial strength or financial profile. which were not inflation-adjusted in high inflation countries. The only way to truly reflect reality is if the bank were to keep two sets of accounts: one in the local currency and one in USD (or in some other currency of reference). changes in regulations can greatly effect the financial statements of a bank. The statements will look inflated and even reflect profits where heavy losses were incurred. 82 . Financial statements are calculated (sometimes stated in USD in addition to the local currency) using the exchange rate prevailing on the 31st of December of the fiscal year (to which the statements refer). the Bank of Russia changed the algorithm for calculating an important banking ratio (the capital to risk weighted assets ratio). fictitious growth in the asset base (due to inflation or currency fluctuations) could result. Consider the thorny issue of exchange rates. in Russia. Admittedly. the financial results do contain a few important facts. In a country with a volatile domestic currency this would tend to completely distort the true picture. for example. Nothing is further from the truth. "Average amounts" accounting (which makes use of average exchange rates throughout the year) is even more misleading. Otherwise. The same applies to financial statements. But one has to look beyond the naked figures to get the real – often much less encouraging – picture. This is especially true if a big chunk of the activity preceded this arbitrary date. Another example: in many countries.

not of health. This misrepresentation is only mildly ameliorated by the introduction of an "average assets" calculus. If most of the bank's assets can be withdrawn by its clients on a very short notice (on demand) – it can swiftly find itself in trouble with a run on its assets leading to insolvency. A 48-hour loan given to a collaborating client can inflate the asset base on the crucial date. In many countries the income from government securities is tax free. But in many countries (Japan. It is important to distinguish interest income from non-interest income. a sharp change in profitability appeared from nowhere. A high income from interest is a sign of weakness. Russia) the government subsidizes banks by lending to them money cheaply (through the Central Bank or through bonds). some of the assets can be interest earning and performing – others.Unless a Russian bank restated its previous financial statements accordingly. the income from interest differentials should be minimal and reflect the risk plus a reasonable component of income to the bank. The maturity distribution of the assets is also of prime importance. commissions and other charges). thus reaping enormous interest income. non-performing. The banks then proceed to lend the cheap funds at exorbitant rates to their customers. here today. Another oft-used figure is the net income of the bank. Moreover. In an open. The preferred indicator should be income from operations (fees. sophisticated credit market. gone tomorrow. 83 . which represents another form of subsidy. The net assets themselves are always misstated: the figure refers to the situation on 31/12.

There are a few key ratios to observe. A relevant question is whether the bank is accredited with international banking agencies. These issue regulatory capital requirements and other mandatory ratios. Compliance with these demands is a minimum in the absence of which, the bank should be regarded as positively dangerous. The return on the bank's equity (ROE) is the net income divided by its average equity. The return on the bank's assets (ROA) is its net income divided by its average assets. The (tier 1 or total) capital divided by the bank's risk weighted assets – a measure of the bank's capital adequacy. Most banks follow the provisions of the Basel Accord as set by the Basel Committee of Bank Supervision (also known as the G10). This could be misleading because the Accord is ill equipped to deal with risks associated with emerging markets, where default rates of 33% and more are the norm. Finally, there is the common stock to total assets ratio. But ratios are not curealls. Inasmuch as the quantities that comprise them can be toyed with – they can be subject to manipulation and distortion. It is true that it is better to have high ratios than low ones. High ratios are indicative of a bank's underlying strength, reserves, and provisions and, therefore, of its ability to expand its business. A strong bank can also participate in various programs, offerings and auctions of the Central Bank or of the Ministry of Finance. The larger the share of the bank's earnings that is retained in the bank and not distributed as profits to its shareholders – the better these ratios and the bank's resilience to credit risks.

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Still, these ratios should be taken with more than a grain of salt. Not even the bank's profit margin (the ratio of net income to total income) or its asset utilization coefficient (the ratio of income to average assets) should be relied upon. They could be the result of hidden subsidies by the government and management misjudgement or understatement of credit risks. To elaborate on the last two points: A bank can borrow cheap money from the Central Bank (or pay low interest to its depositors and savers) and invest it in secure government bonds, earning a much higher interest income from the bonds' coupon payments. The end result: a rise in the bank's income and profitability due to a non-productive, non-lasting arbitrage operation. Otherwise, the bank's management can understate the amounts of bad loans carried on the bank's books, thus decreasing the necessary set-asides and increasing profitability. The financial statements of banks largely reflect the management's appraisal of the business. This has proven to be a poor guide. In the main financial results page of a bank's books, special attention should be paid to provisions for the devaluation of securities and to the unrealized difference in the currency position. This is especially true if the bank is holding a major part of the assets (in the form of financial investments or of loans) and the equity is invested in securities or in foreign exchange denominated instruments.

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Separately, a bank can be trading for its own position (the Nostro), either as a market maker or as a trader. The profit (or loss) on securities trading has to be discounted because it is conjectural and incidental to the bank's main activities: deposit taking and loan making. Most banks deposit some of their assets with other banks. This is normally considered to be a way of spreading the risk. But in highly volatile economies with sickly, underdeveloped financial sectors, all the institutions in the sector are likely to move in tandem (a highly correlated market). Cross deposits among banks only serve to increase the risk of the depositing bank (as the recent affair with Toko Bank in Russia and the banking crisis in South Korea have demonstrated). Further closer to the bottom line are the bank's operating expenses: salaries, depreciation, fixed or capital assets (real estate and equipment) and administrative expenses. The rule of thumb is: the higher these expenses, the weaker the bank. The great historian Toynbee once said that great civilizations collapse immediately after they bequeath to us the most impressive buildings. This is doubly true with banks. If you see a bank fervently engaged in the construction of palatial branches – stay away from it. Banks are risk arbitrageurs. They live off the mismatch between assets and liabilities. To the best of their ability, they try to second guess the markets and reduce such a mismatch by assuming part of the risks and by engaging in portfolio management. For this they charge fees and commissions, interest and profits – which constitute their sources of income.

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If any expertise is imputed to the banking system. 87 . Loans are supposed to be constantly monitored. efficient and exclusive information-gathering systems. Banks are supposed to adequately assess. these yield rather more reliable results than any management's "appraisal". control and minimize credit risks. nonperforming loans. Then it should be compared to the percentage of non-performing loans out of the loans outstanding. and to put in place the right lending policies and procedures. If the two figures are out of kilter.models). What is important to look at is the rate of provision for loan losses as a percentage of the loans outstanding. it is risk management. usually. Most central banks in the world have in place regulations for loan classification and if acted upon. reclassified and charges made against them as applicable. These are the loan loss reserves and provisions. Just in case they misread the market risks and these turned into credit risks (which happens only too often). charge offs and recoveries – either the bank is lying through its teeth. They are required to implement credit rating mechanisms (credit analysis and value at risk – VAR . The first thing new owners of a bank do is. improve the placed asset quality (a polite way of saying that they get rid of bad. or it is not taking the business of banking too seriously. or its management is no less than divine in its prescience. either someone is pulling your leg – or the management is incompetent or lying to you. If you see a bank with zero reclassifications. banks are supposed to put aside amounts of money which could realistically offset loans gone sour or future nonperforming assets. no matter how well intentioned. They do this by classifying the loans. whether declared as such or not).

This. the assets side is the more critical. What percentage of the loans is commercial and what percentage given to individuals? How many borrowers are there (risk diversification is inversely proportional to exposure to single or large borrowers)? How many of the transactions are with "related parties"? How much is in local currency and how much in foreign currencies (and in which)? A large exposure to foreign currency lending is not necessarily healthy. The cash flows generated by the assets of the bank must be used to finance the cash flows resulting from the banks' liabilities. In which financial vehicles and instruments is the bank invested? How risky are they? And so on. No less important is the maturity structure of the assets. the interest earning assets deserve the greatest attention. 88 . The crucial question is: what are the cash flows projected from the maturity dates of the different assets and liabilities – and how likely are they to materialize. adversely affect the quality of the asset base. It is an integral part of the liquidity (risk) management of the bank. A rough matching has to exist between the various maturities of the assets and the liabilities. thus. should be the preferable method. even if they are performing. Of the two sides of the balance sheet. unexpected devaluation could move a lot of the borrowers into non-performance and default and. A sharp. Within it. Liquidity indicators and alerts have to be set in place and calculated a few times daily. A distinction has to be made between stable and hot funds (the latter in constant pursuit of higher yields).In some countries the Central Bank (or the Supervision of the Banks) forces banks to set aside provisions against loans at the highest risk categories. by far.

The very ability to do business (for instance. This is only too logical. Perhaps the single most important factor is the general level of interest rates in the economy. 89 . In an unstable financial environment. It determines the present value of foreign exchange and local currency denominated government debt. of other banks and of investors (domestic as well as international) sets the psychological background to any future developments. Banks sell their portfolios of government debt with an obligation to buy it back at a later date. It influences the balance between realized and unrealized losses on longer-term (commercial or other) paper. But the bank's macroeconomic environment is as important to the determination of its financial health and of its creditworthiness as any ratio or micro-analysis. The implied (not to mention the explicit) support of the authorities. Falling equity markets herald trading losses and loss of income from trading operations and so on. If interest rates shoot up – the losses on these repos can trigger margin calls (demands to immediately pay the losses or else materialize them by buying the securities back).Gaps (especially in the short term category) between the bank's assets and its liabilities are a very worrisome sign. A fine example is the effect that interest rates or a devaluation have on a bank's profitability and capitalization. in the syndicated loan market) is influenced by the larger picture. Still. Banks deposit money with other banks on a security basis. knock-on effects are more likely. One of the most important liquidity generation instruments is the repurchase agreement (repo). The state of the financial markets sometimes has a larger bearing on the bank's soundness than other factors. the value of securities and collaterals is as good as their liquidity and as the market itself.

Liabilities connected to foreign exchange grow with a devaluation with no (immediate) corresponding increase in local prices to compensate the borrower. in turn. raises a real concern regarding the adequacy of the levels of loan loss reserves. pariah. Borrowers default on their obligations. trigger more margin calls and squeeze liquidity further. probably. As liquidity is crunched. repos could absorb liquidity from the banks. Banks are then tempted to play with their reserve coverage levels in order to increase their reported profits and this. It is a vicious circle of a monstrous momentum once commenced. High interest rates here can have an even more painful outcome. in an environment of rising interest rates. Market risk is thus rapidly transformed to credit risk. But high interest rates. Loan loss provisions need to be increased. 90 . deflate rather than inflate.Margin calls are a drain on liquidity. And foreign investment is usually a last resort. Only an increase in the equity base can then assuage the (justified) fears of the market but such an increase can come only through foreign investment. as we mentioned. Japan and China are. eating into the bank's liquidity (and profitability) even further. next). The same principle applies to leverage investment vehicles used by the bank to improve the returns of its securities trading operations. also strain the asset side of the balance sheet by applying pressure to borrowers. in most cases. solution (see Southeast Asia and the Czech Republic for fresh examples in an endless supply of them. This is bound to put added pressure on the prices of financial assets. Thus. The same goes for a devaluation. the banks are forced to materialize their trading losses.

The lending base. So forwards are considered to be a variety of gambling with a default in case of substantial losses a very plausible way out. there are no natural sellers of foreign exchange (companies prefer to hoard the stuff). for instance. Banks depend on lending for their survival. in turn.In the past. In high-risk markets. These two elements are intimately linked with the banking system. the comfort is dubious. Hence the penultimate vicious circle: where no functioning and professional banking system exists – no good borrowers will emerge. 91 . In most emerging markets. depends on the quality of lending opportunities. the thinking was that some of the risk could be ameliorated by hedging in forward markets (=by selling it to willing risk buyers). Whether the borrowers have qualitative collaterals to offer is a direct outcome of the liquidity of the market and on how they use the proceeds of the lending. But a hedge is only as good as the counterparty that provides it and in a market besieged by knock-on insolvencies. this depends on the possibility of connected lending and on the quality of the collaterals offered by the borrowers.

the best and safest thing to do is call the authorization centre of the bank that issued your card (the issuer bank). In principle. it should be transferred to the stop-list available to the authorization centres worldwide. From that moment on. You can sigh in relief. You place a phone call to the number provided in your tourist guide or in the local daily press. Sam Vaknin Your credit card is stolen.Alice in Credit-Card Land On Chargebacks By: Dr. The danger is over. Calling the number published in the media is second best because it connects the cardholder to a "volunteer" bank. 92 . To understand why. notes down the details of the cardholder and prepares a fax containing the instruction to cancel the card. we should first review the intricate procedure involved. In a few minutes. which caters for the needs of all the issuers of a given card. The "catering bank" accepts the call. You block it. Some service organizations (such as IAPA – the International Air Passengers Association) provide a similar service. You provide your details and you cancel your card. But is it? It is definitely not. no thief will be able to fraudulently use your card. The cancellation fax is then sent on to the issuing bank.

93 . By the time the mistake is discovered. going the indirect route (calling an intermediary bank instead of the issuing bank) translates into a delay which could prove monetarily crucial. it might be no longer necessary. He has to clearly identify them and state in writing that they were not effected by him. or Vienna.The details of all the issuing banks are found in special manuals published by the clearing and payments associations of all the banks that issue a specific card. By the time the fax is sent. A process called "chargeback" thus is set in motion. A dispute can be initiated by the cardholder when he receives his statement and rejects one or more items on it or when an issuing financial institution disputes a transaction for a technical reason (usually at the behest of the cardholder or if his account is overdrawn). Here lies the first snag: the catering bank often mistakes the identity of the issuer. the card is usually thoroughly abused and the financial means of the cardholder are exhausted. If the card has been abused and fraudulent purchases or money withdrawals have been debited to the unfortunate cardholders' bank or credit card account – the cardholder can reclaim these charges. Should a fax cancelling the card be sent to the wrong bank – the card will simply not be cancelled until it is too late. Banks with identical names can exist in Prague. for instance. Budapest and Frankfurt. Eurocards and a few other more minor cards in Europe are members of Europay International (EPI). Many banks share the same name or are branches of a network. All the financial institutions that issue Mastercards. Additionally. A chargeback is a transaction disputed within the payment system.

But there are other cases in which this might be either a required or a recommended policy. Despite the warnings carried on many a sales voucher ("No Refund – No Cancellation") both refunds and cancellations are daily occurrences.A technical reason could be the wrong or no signature. 94 . The cardholder presents his card to a merchant (aka: an acceptor of payment system cards). at its discretion. The cardholder himself has no standing in this matter and the chargeback rules and regulations are not accessible to him. This is an abnormal situation whereby rules affecting the balances and mandating operations resulting in debits and credits in the bank account are not available to the account name (owner). important details missing in the sales vouchers and so on. The merchant may request an authorization for the transaction. either by electronic means (a Point of Sale / Electronic Fund Transfer apparatus) or by phone (voice authorization). He is confined to lodging a complaint with the issuer. may decide that issuing a chargeback is the best way to rectify the complaint. To be considered a chargeback. 2. A merchant is obliged to do so if the value of the transaction exceeds predefined thresholds. the card issuer must initiate a well-defined dispute procedure. wrong or no date. A chrageback can only be initiated by the issuing financial institution. The issuer. The following sequence of events is. thus. fairly common: 1. This it can do only after it has determined the reasons invalidating the transaction.

for instance). the merchant notes down the authorization reference number and gives the goods and services to the cardholder. 95 . Mastercard. A mismatch of the signatures (or their absence either on the card or on the slip) invalidate the transaction. 7. The acquiring bank sends the transaction to the payments system (VISA International or Europay International) through its connection to the relevant network (VisaNet. Diners Club) credits the acquirer bank. In a face-to-face transaction (as opposed to a phone or internet/electronic transaction). in the case of Visa. the merchant collects all the transaction vouchers and sends them to his bank (the "acquiring" bank). normally with a copy of the signed voucher. Some banks pre-finance or re-finance credit card sales vouchers in the form of credit lines (cash flow or receivables financing). 6.3. The merchant will then provide the cardholder with a receipt. He must then compare the signature provided by the cardholder to the signature specimen at the back of the card. The credit card company (Visa. 5. Periodically. 4. The acquiring bank pays the merchant on foot of the transaction vouchers minus the commission payable to the credit card company. the merchant must request the cardholder to sign the sale slip. If the transaction is authorized.

It issues monthly or transaction related statements to the cardholder. involuntary debiting of the cardholders account with the bank). in a few minutes. My credit card was stolen in 1998. The same number was also published in my tourist guide and in the local daily press. I gave my details and asked to have my card cancelled. The cardholder will be required to provide a security to the credit card company and his spending limits will be tightly related to the level and quality of the security provided by him. which the cardholder has to pay directly to them by money order or by bank transfer. I thought as I reverted to my delicious lunch. The credit card company sends the transaction to the issuing bank and automatically debits the issuer. 10. I felt safe because I knew that. In such a case. they issue a monthly statement. The very issuance of the card is almost always subject to credit history and to an approval process. sighing in relief. The issuing bank debits the cardholder's account. The cardholder pays the issuing bank on foot of the statement (this is automatic. I placed a phone call to the number provided by my bank. 9. Some credit card companies in some territories prefer to work directly with the cardholders. or at least blocked. From that moment on. 96 . no thief will be able to fraudulently abuse my card.8. in a crowded film festival. my card number will pop up in a stop-list available to authorization centres worldwide.

In my case. or "American Express" in this case. Updating the stop-list is a low priority with the overworked weekend stuff of the "catering bank". for instance. they alerted the wrong bank in the wrong country. Sometimes it takes hours before the list is updated. The thieves simply abused it to the limit. asking it to cancel the card. the issuing bank. All the financial institutions that issue MasterCards. Eurocards and a few other minor cards in Europe are members of Europay International (EPI). Though rarely advised to do so. That being a weekend. or Vienna. IAPA – the International Air Passengers Association) provide a similar service.g. The details of all the issuing banks are available in special manuals. It belonged to a "volunteer" bank.especially branches of the same bank . Banks with identical names exist in Prague. which catered to the needs of all the issuers of a given type of card .e. Zagreb. Budapest.are eponymous. The "catering bank" sends a fax to the issuing bank. the number I called instead was a poor second. for example.. Some travel service organizations (e. Many issuers . Here lies the first snag: the catering bank often mistakes the identity of the issuer."MasterCard". These are published by the clearing and payments associations of all the banks that issue a specific type of card. London.. My card was never blocked. the best and safest thing is to call the authorization centre of the bank that issued the card .i. "Visa".But the danger was far from over. Frankfurt. 97 .

By the time the fax is sent. at its discretion. The typical credit card transaction involves these steps: 1. It can also be initiated by the card-issuer on technical grounds. In the USA credit card liability in case of fraudulent transactions is limited to the first $50. The issuer. going the indirect route (calling an intermediary bank instead of the issuing bank) translates into a delay which could prove monetarily crucial. fraudulent charges and money withdrawals. A chargeback is a transaction disputed within the payment system by the cardholder through the card issuer. standard credit card contracts in some countries apply coverage only one hour after the theft . usually at the behest of the cardholder or if his account is overdrawn: wrong or no signature. 98 . This ritualistic dispute procedure is called "chargeback". wrong or no date.Thus. The cardholder presents his card to a merchant.when most of the damage has already been done. Despite the warnings carried on many a sales voucher ("No Refund – No Cancellation") both refunds and cancellations occur daily. important details missing in the sales vouchers and so on. may decide that issuing a chargeback is the best way to rectify the complaint. The rules and regulations governing chargebacks are internal and inaccessible to him though they often result in debits and credits to his bank account. The cardholder himself has no standing in the process and is confined to lodging a complaint with the issuer. the acceptor. The cardholder can reclaim. it might be no longer necessary. in writing. To be on the safe side.

the goods. card companies. The acquiring bank credits the merchant's bank account with the difference between the total amount of the transactions and the commissions and fees payable to the credit card company. or ships.i. normally with a copy of the signed voucher. The merchant may request an authorization for the transaction. A merchant is obliged to do so if the value of the transaction exceeds predefined thresholds. The merchant then provides the cardholder with a receipt.2. 4. 99 . 5. he must sign the sale slip (voucher) and the merchant validates the signature by comparing it to the specimen at the back of the card. the merchant notes down the transaction authorization code and gives. If the cardholder is present. or services to the cardholder. If authorized. either by electronic means (a Point of Sale / Electronic Fund Transfer apparatus) or by phone (voice authorization). 3. But there are other cases in which this might be a policy either required or recommended by issuers. they lend against future credit card revenues.. The transaction goes through only if the signatures match.e. or clearinghouses. Some banks pre-finance or re-finance credit card sales vouchers (receivables financing) . The merchant collects all the transaction vouchers periodically and gives them to his bank (the "acquiring" bank).

placed in its "Merchant Watch" list and forced to set aside $125. In some countries . Africa. collateral. Despite its positive cashflow and good standing with the bank. or Europay International) through its connection to the relevant network (VisaNet. in the case of Visa. Andrew Greenstein's Internet business . The acquiring bank forwards the slips or an electronic ledger to the payments system (VISA International. Credit history.000 in a reserve account. The issuing bank automatically debits the cardholder's account. the Middle East. The credit card company sends the transactions to the issuing bank and automatically debits it. and background checks are rigorous. 100 . The credit card company (Visa. The cardholder is often required to provide a security to the credit card company and his spending limits are tightly supervised.cards.6.sold last year did a great volume of credit card transactions and experienced chargebacks of between 0.rather than credit . Diners Club) credits the acquiring bank.mainly in Central and Eastern Europe. the majority of the cards issued are debit . Even then. 8. for instance).5 to 3 percent. and Asia .credit card companies sometimes work directly with their cardholders who pay the companies via money order or bank transfer. Its fee per chargeback shot from nil to $25 on local cards and $50 per foreign chargeback. 7. 9. MasterCard. it was fined by Visa. It issues monthly or transaction related statements to the cardholder.

Com to help less knowledgeable merchants benefit from my years of 'education' in the field'. used various online credit card processing software. and helped the company scale down its chargeback picture considerably. offsetting reserves.led me to create ChargebackPrevention.fees. I'd say that the amount of chargebacks/fraudulent orders is only increasing as more people take to the Internet and as more pranksters realize that the odds of "getting busted" are pretty low. a large positive cashflow. bank switches. It was always frustrating though that even when we'd show Merchant Services & Visa dramatically reduced chargebacks. for years the company continued to suffer nicks and jabs at the whim of either Merchant Services or Visa. 101 . Having no medium-wide statistics. Still. I experienced bank re-negotiations. increased revenue.' "It always seemed as though they were doing it to profit knowing full well that the company I ran had one of the rosiest chargeback pictures of all and one of the cleanest reputations around. I successfully negotiated our way out of additional reserve accounts. they'd continue to fine us over and over again. years of success. My years of experiences getting new accounts.75% was 'too high for an Internet business. letters from accountants. insisting that even 1. How bad is the problem of Internet credit card fraud? A. etc. changing accounts.sometimes virtually no . and more .Greenstein says: "Over the years." Q. set up alternate merchant accounts with lower .

in the back of their minds.Though frustrating to businesses." That's when Internet credit card fraud becomes a the seed that spawns a whole garden of trouble. Abuse exists in any scenario. Indeed. I don't think there's a big problem of people doing it regularly. and breach of sales contracts. 102 . Still. When they see someone doing it excessively. I believe that most reasonably-accomplished outfits can survive with a certain number of chargebacks even if it amounts to 3 or 4%. faulty products. Chargebacks allow consumers to protect themselves against fraud. I also believe that the ONE thing Visa/MasterCard does right is to limit people in quality dispute chargebacks. I'd have to say that the number of people intentionally doing chargebacks to get money back is quite low. but there is a problem when consumers read articles like this one and realize. they flag their account. The problem arises when the "powers-that-be" add insult to injury by demanding a reserve account. consumers are abusing this protection!". those few cases of torment when they knew they were being taken advantage of probably stuck in their memory and their response would be "yes. how would you restructure the chargeback process to balance the rights and obligations of all parties? A. I can't help but recall those individual cases of obvious abuse. or by arbitrarily "fining" merchants for being "bad boys. Would you say that consumers are abusing this protection? If so. If you ask most merchants. that they can chargeback. Q. Then every slight problem with a merchant gets blown out of proportion and they try to get the product/service for free.

57 and even 4 percent. fines.and offers many pages of information and even examples of successful rebuttal letters .2-2.3 percent depending on the variables involved. I would say that while there are some abuses . Many newer merchants pay as much as 2. however. There are ways they could improve the tackling of fraud but I can't see many ways they can improve the treatment of quality disputes. Every once in a while you come across a grumpy anti-merchant sort of chargeback handler burnt out and tired of his or her job reviewing chargebacks all day. A few merchants even pay a bogus $10-$15 fee per ticket retrieval request. Take it from someone who has successfully reversed .In my experience.this is the one area MC/VISA has "down pat" reasonably well.teaching merchants how to diffuse this sort of chargeback. But such cases are few and far between. chargebacks. Most merchants pay $10-$15 per chargeback but some pay as high as $25. In sum.Com spends a great deal of time on this . though they can definitely negotiate a lower rate.or been involved in the reversal of -hundreds of these! Q. 103 . and reserve accounts (please explain each of these terms)? Processing discount rates right now for phone/mail orders seem to have bottomed out around 2. Everything is well-mediated. What percentage of sales goes towards paying credit card-related expenditures: processing fees. quality dispute chargebacks are generally very easy to reverse or beat and ChargebackPrevention.

So you can lose your $50 plus pay another $90 by the time you're done .. this increases the processing discount rate a bit .with lower discount fees or with lower or no chargeback fees. and then even if you reverse the chargeback . 15-40 cents per transaction (unless you negotiate a no fee per transaction deal).in the worst case scenario with the worst merchant account conceivable! Merchants can negotiate deals with no chargeback fees though.some banks charge another $25 to do it. If the customer does a second chargeback. that's another $25.Thus. if you have a $50 sale and the customer has a gripe. and $0-$25 per chargeback. Chargeback and reserve accounts happen only to "select" merchants. In sum. of course! But additional fees sometimes seen are: *Extra charges if the merchant's batch isn't settled every 24 hours *Additional fees and/or augmented rates for international transactions *Specific per transaction fees for the type of software being used or to have "the privilege" of checking AVS or CVV2 *Monthly statement fees .unless otherwise negotiated.5% paid for processing discount rates. you may be slapped with a $15 fee for the slip request. another $25 for the chargeback. generally. 104 . figure an average of 2.so merchants need to crunch numbers to figure out where they save the most money .

and it's very difficult (but. But grabbing $100k or more from so many merchants and holding it for 6 months or longer . It's no wonder it's so difficult to get out of the "Merchant Watch Program".can only be increasing bank profits ever so much. and related fines. I found the "loss prevention" people to be vindictive and senseless with little concern for anything other than their own agenda. Visa certainly has no incentive to release the merchants on the list when they can get away with fining them $10. I could never fully understand how a corporate entity is allowed to "fine" its customers. reserve accounts.almost at whim. In the case of the e-business I developed and owned for so many years.it's one of the most corrupt businesses out there. Do they contribute to the proliferation of chargebacks? Wouldn't you say that the relationship between financial intermediaries (banks. Some merchant representatives seem motivated to set reserve accounts and are probably paid based on some sort of incentive program. processing agents.000 or more .Q. There appear to be employees at FirstData (which now has a virtual monopoly) who do nothing else but answer calls from merchants griping about reserve accounts . credit card companies) are incestuous and that the problem is structural? In my opinion. 105 . though generally viewed as being noble and legitimate . Reserve accounts at least make a little bit of sense for banks to protect themselves. not impossible) to get them to act in the merchant's favor. from our experience. Processing agents seem to benefit greatly from chargeback fees.

FirstData has the "right" to use the letterhead of any bank they represent and to act "on their behalf". has never failed to pay a chargeback. But really the two interests couldn't be more contrary! In one case.000 immediately to offset potential losses to the bank from chargebacks! We had the President of our bank call FirstData directly and tell them not to hold any of the company's money.000 worth of open credit even as FirstData's "mid-level risk loss prevention" department was telling us that we're a "risky business" and need to post $100. so newer merchants tend to think they're dealing w/ their own merchant bank directly. FirstData didn't know or realize that our bank gave us $100.but it refused to release our funds despite the explicit request of the bank whose merchant services they're contracted to represent! 106 . has a positive cash flow and so on .her response was simply: "We don't care about making money. our corporate checking account had an open $100." And that was a management-level employee.When one loss prevention agent was shown in detail by a team of accountants that the company only makes money. turns profits.acting in the name of the bank's merchant services . FirstData uses that bank's letterhead and claims to represent it . Yet FirstData . informing them what a great client we were and what a great banking relationship we had.000ish reserve was necessary to offset chargebacks.000 line of credit.declared after 2 years that a $100. An even better example comes to mind. we only care about loss prevention.

At ChargebackPrevention. do you believe that the aggressive marketing drives of credit card issuers. etc.Q. "card present" transactions are safer for merchants.better than CVV2 verification or any other generic technique touted by MC/Visa . we teach users precisely what to look for. what to say. Even though it adds a bit of time and expense. Give us one tip or technique on how to avoid chargebacks and describe the most widespread frauds A. Internet frauds enjoy their anonymity and are scared senseless about actually playing their act out over the telephone. involving little or no background checks. Obviously. 107 . You'll find out who is real and who is fraudulent if you pick up the phone and start calling the phone numbers on your incoming order forms. the one technique that works best . Can you compare the advantages and disadvantages of "card not present" and "card present" sales? Is ecommerce hobbled by some of the procedures and safeguards required by credit card companies and clearinghouses? A.Com. contribute to an increase in credit card fraud? A. Q. what questions to ask over the telephone. Most of them aren't "real" thieves in the sense that they would shoplift from retail stores or perpetrate fraud in a non-electronic scenario.is to verbally verify each order. no comment on this aspect! Q. Sorry. Can you comment on the current antitrust investigation against Visa and MasterCard and its potential implications? Additionally. Just pick up the phone and call each customer.

If only every computer terminal could have its own magnetic swiping device! I can't help but wonder if clearinghouses are just seeing e-commerce as a "whipping boy" - constantly crying wolf - telling merchants that they have too many chargebacks and hitting them with profitable fines. Retailers usually don't have the same chargeback problems as E-tailers when it comes to fraud. But E-tailers generally don't have the same overhead that retailers do so we're able to comfortably survive with 3, 4, 5 percent chargebacks. But clearing houses are too gung-ho in their search for "red flags." They simply need to stop applying the same flags to every business in every case. A company that delivers information electronically is going to have more chargebacks than one who ships to a home address. But a company with a negative cashflow is going to be more of a risk than a company with a positive one. They should really evaluate companies more deeply before charging them with so many fines and fees. Most of the advice given by clearinghouses is generic and empty and that's one of the main reasons chargebackprevention.com came to be. Telling everyone: ship to the billing address only, use AVS, and use CVV2 may be fine and dandy but billing addresses don't apply to information-only merchants, AVS can cause problems of its own and CVV2 still confounds customers and loses legitimate sales when they fail to recite their credit card number by heart.

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ChargebackPrevention.Com tries to create more of a 'happy third way' between reducing chargebacks and maintaining sales volume - something that the powersthat-be seem to care very little about. When they get chargebacks down, they reward themselves, they pat themselves on the back, they attribute it to their fines and strong-armed reserve accounts - without delving deeper. We try to teach the merchant to proactively avoid fraud, reserve accounts, and fines and to reactively deal with these issues effectively when they do occur. Q. How will smart wallets, e-cash, PayPal and other debit/credit money substitutes affect the credit card industry? I haven't seen much worth experimenting with. They require the customer to go through extra steps. So many online buyers are still "new to it". Some are making impulse purchases and some are just barely convinced to buy. Requiring them to go sign up for an account with PayPal and so forth is asking for extra steps, instructions, and can pull them out of "the ether", or make them back away from sales. Only the net-savvy really know about companies like Pay Pal and trust them. The typical occasional user about to make a purchase at your site is trusting enough to give you their information. Going over to PayPal adds another party, one they haven't even always heard of as often as you or I. I would never risk clientele by asking them to sign up.

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Workaholism, Leisure and Pleasure
By: Dr. Sam Vaknin Also Read: Entrepreneurship and Workaholism

The official working week has been reduced to 35 hours a week in France. In most countries in the world, it is limited to 45 hours a week. The trend during the last century seems to be unequivocal: less work, more play. Yet, what may be true for blue collar workers or state employees – is not necessarily so for white collar members of the liberal professions. It is not rare for these people – lawyers, accountants, consultants, managers, academics – to put in 80 hour weeks. The phenomenon is so widespread and its social consequences so damaging that it has acquired the unflattering nickname workaholism, a combination of the words "work" and "alcoholism". Family life is disrupted, intellectual horizons narrow, the consequences to the workaholic's health are severe: fat, lack of exercise, stress - all take their lethal toll. Classified as "alpha" types, workaholics suffer three times as many heart attacks as their peers. But what are the social and economic roots of this phenomenon?

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his produce mostly consumed locally . This distinction between time dedicated to labour and time spent in the pursuit of one's hobbies – was so clear for thousands of years that its gradual disappearance is one of the most important and profound social changes in human history. the bulk of the workforce was still immobile and affixed to the production floor. Arguably the most important was the increase in labour mobility and the fluid nature of the very concept of work and the workplace. But raw materials and finished products travelled long distances to faraway markets.Put succinctly. His means of production are fixed. it is the outcome of the blurring of boundaries between work and leisure. and transportation.especially in places which lack proper refrigeration. the lawyer. increased the mobility of the workforce. and now to the knowledge society. the consultant. Professional services were needed and the professional manager. the trader. 111 . food preservation. A farmer is the least mobile. True. A host of other shifts in the character of work and domestic environments of humans converged to produce this momentous change. This group exploded in size with the advent of the industrial revolution. the broker – all emerged as both parasites feeding off the production processes and the indispensable oil on its cogs. The transitions from agriculture to industry. A marginal group of people became nomad-traders. then to services. the accountant.

with the advent of the information and knowledge revolution. It is easily transferable across boundaries. Phenomena like commuting to work and multinationals were first made possible. This means that workers can collaborate not only across continents but also across time zones. These technological advances precipitated the transmutation of the very concepts of "work" and "workplace". The twin revolutions of transportation and telecommunications really reduced the world to a global village. The locations of the participants in the economic interactions of this new age are transparent and immaterial. other forms of digital data. for instance. This trend accelerated today. Work could be performed in different places. Facsimile messages. Today. They rendered their services to a host of geographically distributed "employers" in a variety of ways. textual and other). by workers who worked part time whenever it suited them best. goods and data (voice. the Internet .broke not only physical barriers but also temporal ones. These trends converged with increased mobility of people. virtual offices are not only spatially virtual – but also temporally so. It is cheaply reproduced.The protagonists of the services society were no longer geographically dependent. The three Aristotelian dramatic unities no longer applied. 112 . visual. Knowledge is not geography-dependent. They can leave their work for someone else to continue in an electronic mailbox. electronic mail. Its ephemeral quality gives it non-temporal and nonspatial qualities. not simultaneously.

Flextime and work from home replaced commuting (much more so in the Anglo-Saxon countries.all helped bring this about.. But productivity gains made humans redundant. the level of unemployment attributable to changes in the very structure of the market). automatization. telecommunications (which facilitates more efficient transfers of information). even new design concepts . innovative inventory control methods. plant modernization. People were encouraged to feel and behave as distinct. The perception of individuals as islands replaced the former perception of humans as cells in an organism. The more technologically advanced the country – the higher its structural unemployment (i. improved production technologies. New management techniques.e. No amount of retraining could cope with the incredible rate of technological change. but they have always been the harbingers of change). robotization. 113 . such as the nuclear (not to mention the extended) family. presented as a private case of capitalism and liberalism. This trend was coupled with – and enhanced by – unprecedented successive multi-annual rises in productivity and increases in world trade. This fitted squarely into the social fragmentation which characterizes today's world: the disintegration of previously cohesive social structures. All this was neatly wrapped in the ideology of individualism. autonomous units.

One way to manage this flood of ejected humans was to cut the workweek. it shot up from 5-6% of the workforce to 9% in one decade. both work and leisure were pleasurable – or torturous – or both. like leisure. and to express the entire range of their personality and potential. The emotional leap was only a question of time. What they did after work was designated as "pleasure". 114 . The third. Whereas the Jewish and Protestant work ethics condemned idleness in the past – the current ethos encouraged people to contribute to the economy through "self realization". a lack of framework. They are both commended now. The territorial separation between "work-place" and "home turf" was essentially eliminated. They are the workaholics. with whom and to what end. when. more tacit. They were not taught to deal with too much free time. no clear instructions what to do. It is often pursued from home. leisure-like environment. Some people began to enjoy their work so much that it fulfilled the functions normally reserved to leisure time. way was to legitimize leisure time. Others continued to hate work – but felt disorientated in the new. Historically. Now.In Western Europe. Another was to support a large population of unemployed. This served to blur the historical differences between work and leisure. to pursue their hobbies and non-work related interests. became less and less structured and rigid. Work. people went to work because they had to.

the energy. the battle of brains. radically lag behind. educators. the shakers. They are entrepreneurial. Workaholics identify business with pleasure. the ups and downs. They are the managers and the businessmen and the scientists and the journalists. foresight. money serves to measure success – but it is an abstract meter. They are hedonistic and narcissistic. True. employers) were not geared – nor did they regard it as their responsibility – to train the population to cope with free time and with the baffling and dazzling variety of options on offer. and insight. They do what they do because they like the Game of Business. stamina. do not do business because they are interested in money (the classic profit motive). akin to monopoly money. the excitement. Those that maintain the old distinction between (hated) work and (liberating) leisure – are doomed to perish or.Socialization processes and socialization agents (the State. All this has nothing to do with money. They are the movers. Without workaholics. maintain and expand capitalism. In these economies of "collective ownership" people go to work because they have to. As opposed to common opinion. It takes workaholics to create. This is because they will not have developed a class of workaholics big enough to move the economy ahead. 115 . subjugating markets. mostly. parents. It has everything to do with psychology. its twists and turns. with strong disincentives to work. at best. the brainstorming. wit. we would have ended up with "social" economies. people. It is proof shrewdness. the pushers. We can classify economies and markets using the workleisure axis.

Witness the prosperous USA and compare it to the miserable failure that was communism. And this is the true meaning of capitalism: the abolition of the artificial distinction between work and leisure and the pursuit of both with the same zeal and satisfaction. Because transition happens in the human mind much before it takes form in reality. they wither and die (professionally) – because no one can live long in hatred and deceit. They harbour negative feelings. How right was he. to legislate. you describe how the line between leisure and work has blurred over time. many of them. or to bribe. 116 . The distinction between work and leisure times is a novelty. It was Marx (a devout noncapitalist) who said: it is consciousness that determines reality. Above all. put in 7 days a week.Their main preoccupation is how to avoid it and to sabotage the workplace. with whomever you choose. Leisure and Pleasure. Joy is an essential ingredient of survival. It is no use to dictate. to cajole. In your article. Workaholism. FROM AN INTERVIEW I GRANTED Q. Unless and until Homo East Europeansis changes his state of mind – there will be no real transition. to finance. What has allowed this to happen? What effect does this blurring have on the struggle to achieve a work-life balance? A. Even 70 years ago. wherever. the (increasing) liberty to do it whenever. Slowly. people still worked 16 hours a day and.

they dedicate time to their families and communities. To the majority of people in the developing countries. Labour mobility increased. rich. It is the inevitable outcome of a confluence of a few developments: I. work was and is life. His means of production are fixed. Sure. His means of production are fixed. But there is little leisure left to read. or attend classes.the blurring of boundaries between leisure time and time dedicated to work . Leisure time emerged as a social phenomenon in the twentieth century and mainly in the industrialized. An industrial worker is attached to his factory. Cyberspace replaces real space and temporary or contractual work are preferred to tenure and corporate "loyalty". countries. more so. They would perceive the contrast between "work" and "life" to be both artificial and perplexing.More than 80% of the world's population still live this way. They are much more itinerant. The advent of the information and knowledge revolutions lessened the worker's dependence on a "brick and mortar" workplace and a "flesh and blood" employer. Workaholism . II. in the knowledge industries are attached only to their laptops.is. They render their services to a host of geographically distributed "employers" in a variety of ways. 117 . nurture one's hobbies. A farmer is attached to his land. therefore. introspect. His markets are largely local. Workers in the services or. simply harking back to the recent past.

IV.the number of social alternatives to work declined. 118 .Knowledge is not geography-dependent. It is portable and cheaply reproduced. the airplane. electronic mail. The very concepts of "workplace" and "work" were rendered fluid. The extended and nuclear family was denuded of most of its traditional functions. III. The car.demolished many physical and temporal barriers. The geographical locations of the participants in the economic interactions of this new age are transparent and immaterial. The mobility of goods and data (voice. Phenomena like commuting to work and globe-straddling multinationals were first made possible. Society is anomic and work has become a route of escapism. Workers today often collaborate in virtual offices across continents and time zones. Most communities are tenuous and in constant flux. such as the nuclear family. and dysfunctional world. while the choice of work-related venues and pursuits increased . if not obsolete. Work is the only refuge from an incoherent. Flextime and work from home replaced commuting. other forms of digital data. textual and other) increased exponentially. fractious. The dissolution of the classic workplace is part of a larger and all-pervasive disintegration of other social structures. visual. facsimile messages. The twin revolutions of transportation and telecommunications reduced the world to a global village. the Internet . Thus.

really it is merely an addiction. VI. Pathological narcissism replaced selflove and empathy. robotization. The historical demarcation between work and leisure is lost. and efficiency. Instead of working in order to live people began living in order to work. Leisure substitutes for work.V. ambition. The metaphor of individuals as islands substituted for the perception of humans as cells in an organism.all helped bring workaholism about by placing economic values in the forefront. improved production technologies. As workers are made redundant by technology-driven productivity gains . Yet. Malignant individualism replaced communitarianism.mistakenly identified with entrepreneurship. autonomous units. New management techniques. People are encouraged to feel and behave as distinct. automatization. even new design concepts . Workaholics are rewarded with faster promotion and higher income. The Protestant work ethic ran amok. 119 . The absurd is that workaholism is a direct result of the culture of leisure. telecommunications (which facilitates more efficient transfers of information). Workaholism is often .they are encouraged to engage in leisure activities. Both are commended for their contribution to the economy. plant modernization. innovative inventory control methods. The ideology of individualism is increasingly presented as a private case of capitalism and liberalism. The last few decades witnessed unprecedented successive rises in productivity and an expansion of world trade.

the (increasing) liberty to do so whenever. People don't work or conduct business only because they are after the money. Both types . The state. Others continue to hate work .end up sacrificing their leisure time to their work-related activities. Above all. 120 .but feel disorientated in the new leisure-rich environment. educators. with a lack of clearly delineated framework. and to what end. when.all failed to train the population to cope with free time and with choice. They are the workaholics. without clear instructions as to what to do. The territorial separation between "work-place" and "home turf" is essentially eliminated. with whom. like leisure.Work. Alas. employers . Both work and leisure are often pursued from home and are often experienced as pleasurable. And this is the true meaning of capitalism: the abolition of the artificial distinction between work and leisure and the pursuit of both with the same zeal and satisfaction. maintain and expand capitalism. with whomever you choose. They enjoy their work or their business. They find pleasure in it. parents. They are not taught to deal with too much free and unstructured time. it takes workaholics to create.the workaholic and the "normal" person baffled by too much leisure . is less and less structured and rigid. wherever. Some people enjoy their work so much that it fulfils the functions normally reserved to leisure time.

recording records. it is the public which pays the price of piracy. The prize money (a few thousand DMs) was snatched by the publishing house on the legal grounds that all the money generated by the book belongs to them because they own the copyright. A few months later (1997). etc.The Revolt of the Poor The Demise of Intellectual Property? By: Dr. As a result. In the mythology generated by capitalism to pacify the masses. goes the refrain. the myth of intellectual property stands out. It goes like this : if the rights to intellectual property were not defined and enforced. 121 . The publishing house belongs to Israel's leading (and exceedingly wealthy) newspaper. I signed a contract which stated that I am entitled to receive 8% of the income from the sales of the book after commissions payable to distributors. commercial entrepreneurs would not have taken on the risks associated with publishing books. Ultimately. creative people will have suffered because they will have found no way to make their works accessible to the public.Innovation and the Capitalist Dream Three years ago I published a book of short stories in Israel. and preparing multimedia products. I won the coveted Prize of the Ministry of Education (for short prose). shops. Sam Vaknin Also Read Contracting for Transition The Case of the Compressed Image The Disruptive Engine .

Economically and rationally. we should expect that the costlier a work of art is to produce and the narrower its market . Schwarzenegger and Grisham are businessmen at least as much as they are artists. Forced to defend their intellectual property rights and the interests of Big Money. Michael Jackson.000 DM to produce with a potential audience of 1000 purchasers (certain academic texts are like this) . 122 . Consider a publishing house. Piracy (illegal copying) should in this case be more readily tolerated as a marginal phenomenon. thus driving out potential buyers.would have to be priced at a minimum of 100 DM to recoup only the direct costs. If illegally copied (thereby shrinking the potential market as some people will prefer to buy the cheaper illegal copies) .But this is factually untrue.000 readers. Only select musicians eke out a living from their noisy vocation (most of them rock stars who own their labels George Michael had to fight Sony to do just that) and very few actors come close to deriving subsistence level income from their profession.000 DM to produce and is priced at 20 DM a copy with a potential readership of 1. The story is different if a book costs 10. Madonna. A book which costs 50. All these can no longer be thought of as mostly creative people.000. In the USA there is a very limited group of authors who actually live by their pen.the more emphasized its intellectual property rights.its price would have to go up prohibitively to recoup costs.

But this defies logic : the market today is global. So why should the big manufacturers. publishing houses. The artist was but a mere channel through which divine grace flowed.the fiercer the battle against piracy. are introducing intellectual property laws (under pressure from rich world countries) and enforcing them belatedly. the speedy recouping of the investment virtually guaranteed. inventions. from China to Macedonia. or as someone's 'property'. the costs of production are lower (with the exception of the music and film industries). The illegal product is inferior to the legal copy (it comes with no literature.two sprout off shore (as is the case in Hong Kong and in Bulgaria). Intellectual property is a relatively new notion. piracy thrives in very poor markets in which the population would anyhow not have paid the legal price. no one considered knowledge or the fruits of creativity (art. the marketing channels more numerous (half of the income of movie studios emanates from video cassette sales). the chosen ones. But the facts are tellingly different.This is the theory. discoveries. the conduits. Moreover. record companies. warranties or support).the more pressure is applied to clamp down on samizdat entrepreneurs. But where one factory is closed on shore (as has been the case in mainland China) . works of art and music. designs all belonged to the community and could be replicated freely. The bigger the market . were honoured but were rarely financially rewarded. 123 . Governments. The less the cost of production (brought down by digital technologies) . software companies and fashion houses worry? The answer lurks in history. True. In the near past. Texts. design) as 'patentable'.

The patent was born. Hence its efforts to eradicate piracy . This is a threat which Microsoft cannot tolerate. The aim is to secure a monopoly on a specific work. When he sells a pirated Microsoft product . but of a client (=future income). of its monopolistic status (cheap copies can be smuggled into other markets). software embedded in hardware. processes.despite their noble title . the bigger the financial stakes .he is depriving Microsoft not only of its income. works of art and music. business methods. software.circulation magazines do not allow their content to be quoted or published even for non-commercial purposes. The monopolists of knowledge and intellectual products cannot allow competition anywhere in the world . Intellectual property rights . mainly as embedded in machinery. books. processes. It spread from machinery to designs. This is Big Money : the markets in intellectual property outweigh the total industrial production in the world. Only with the advent of the Industrial Revolution were the embryonic precursors of intellectual property introduced but they were still limited to industrial designs and processes. in most cases.the larger loomed the issue of intellectual property. and even unto genetic material.because theirs is a world market.They were commissioned to produce their works of art and were salaried. at their beginning were not considered art). A pirate in Skopje is in direct competition with Bill Gates. and of its competition-deterring image (a major monopoly preserving asset).are less about the intellect and more about property. 124 . any printed matter.successful in China and an utter failure in legallyrelaxed Russia. the more sophisticated the sales and marketing techniques. The more massive the market. newspapers. This is an especially grave matter in academic publishing where small. films (which.

not with the pirates. the Encarta is 20 times more expensive. at the right price a lot of people are willing to buy these products. 125 .But what Microsoft fails to understand is that the problem lies with its pricing policy . In America. There is no other way to explain the pirate industries : evidently. Either the price should be lowered in the Macedonian market . I published a few book on the Internet and they can be freely downloaded by anyone who has a computer or a modem.or to use discretionary differential pricing (as pharmaceutical companies were forced to do in Brazil and South Africa). One is the Internet. A Macedonian with an average monthly income of 160 USD clearly cannot afford to buy the Encyclopaedia Encarta Deluxe. High prices are an implicit trade-off favouring small. therefore. select. 50 USD is the income generated in 4 hours of an average job. This raises a moral issue : are the children of Macedonia less worthy of education and access to the latest in human knowledge and creation ? Two developments threaten the future of intellectual property rights. Academics. elite.or an average world price should be fixed which will reflect an average global purchasing power. rich world clientele. a company can adopt one of two policies: either to adjust the price of its products to a world average of purchasing power . In Macedonian terms. Something must be done about it not only from the economic point of view. fed up with the monopolistic practices of professional publications .already publish on the web in big numbers. When faced with a global marketplace. Lower prices will be more than compensated for by a much higher sales volume. Intellectual products are very price sensitive and highly elastic.

CD-ROMs can be written on. A single person. personal music recording. The oftvindicated Moore's law predicts the doubling of computer memory capacity every 18 months. Web pages are hosted free of charge. But memory is only one aspect of computing power. A complete music studio with the latest in digital technology has been condensed to the dimensions of a single chip. Miniaturization and concurrent empowerment by software tools have made it possible for individuals to emulate much larger scale organizations successfully. billboards. But this is only one side of the story. As the Internet acquires more impressive sound and video capabilities it will proceed to threaten the monopoly of the record companies. and the to the digitization of plastic art. professional publications. and thousands of books is available online. This will lead to personal publishing. and authoring and publishing software tools are incorporated in most word processors and browser applications. trade journals.The full text of electronic magazines. 126 . the movie studios and so on. Another is the rapid simultaneous advance on all technological fronts. It is very easy and cheap to publish on the Internet. stamped and copied in house. sitting at home with 5000 USD worth of equipment can fully compete with the best products of the best printing houses anywhere. The second development is also technological. the barriers to entry are virtually nil. Hackers even made sites available from which it is possible to download whole software and multimedia products.

and the sales that determine the economic outcome. I published one book the traditional way . Nowadays. the media campaign. lowest common denominator art and they are fighting back.000. Secondly. This advantage. First. the distribution.000 people read it (my Link Exchange meter registered c. I have received 6500 written responses regarding my electronic book. the likelihood of being seen by surprisingly large numbers of consumers is high. Well over 500. the Internet is a huge (200 million people). truly cosmopolitan market. is also being eroded. But in an age of information glut. In 50 months. there is a psychological shift. anyone can print a visually impressive book. Creative people are repelled by what they regard as an oligarchic establishment of institutionalized.and another on the Internet.000 impressions since November 1998). 2. Rather it lies in its vast pool of capital. with its own marketing channels freely available to all.The relative advantage of the intellectual property corporation does not consist exclusively in its technological prowess. and distribution network. with a minimum investment. however. it is the marketing. Even by default. its marketing clout. market positioning. sales organization. 127 . using the above-mentioned cheap equipment. a reaction to the commercialization of intellect and spirit.

In other words.and 500. Indeed. The demise of intellectual property has lately become abundantly clear.It is a textbook (in psychopathology) . I am so satisfied that I am not sure that I will ever consider a traditional publisher again. Subscription based models are bound to fail. consumption patterns and preferences and so on) and by being exposed to advertising. The old intellectual property industries are fighting tooth and nail to preserve their monopolies (patents. This model . 128 . copyright) and their cost advantages in manufacturing and marketing. trademarks. But they are faced with three inexorable processes which are likely to render their efforts vain: The Newspaper Packaging Print newspapers offer package deals of cheap content subsidized by advertising.000 readers is a lot for this kind of publication. my last book was published in the very same way.adopted earlier by radio and television rules the internet now and will rule the wireless internet in the future. Content will be made available free of all pecuniary charges. the advertisers pay for content formation and generation and the reader has no choice but be exposed to commercial messages as he or she studies the content. The consumer will pay by providing his personal data (demographic data.

content creators will benefit only by sharing in the advertising cake. The internet also provides a venue for the marketing of niche products and reduces the barriers to entry previously imposed by the need to engage in costly marketing ("branding") campaigns and manufacturing activities. One will seek to distinguish oneself. remote collaboration and similar labour market trends. This is a return to preindustrial times when artisans ruled the economic scene. This trend is also likely to restore the balance between artist and the commercial exploiters of his product. Streaming audio on the internet or downloadable MP3 files will render the CD obsolete. products. etc.Thus. Consider music for instance. to "brand" oneself and to auction off one's services. experience. 129 . head hunting. Disintermediation A lot of ink has been spilt regarding this important trend.is a historic development (though the continuation of a long term trend). Work stability will vanish and work mobility will increase in a landscape of shifting allegiances. The removal of layers of brokering and intermediation mainly on the manufacturing and marketing levels . They will find it increasingly difficult to implement the old models of royalties paid for access or of ownership of intellectual property. ideas. designs. The very definition of "artist" will expand to include all creative people.

sinister) juggernaut it once was. to conspiracy theorists. a network of shifting affiliations replaces the rigid owned-branch system. The mega-corporation of the future is more likely to act as a collective of start-ups than as a homogeneous. mass customization replaces mass production. Narrowcasting replaces broadcasting. The decentralized. intrapreneurship-based corporation is a late response to these trends. uniform (and.economies of scale in manufacturing and distribution are meaningless. 130 .Market Fragmentation In a fragmented market with a myriad of mutually exclusive market niches. consumer preferences and marketing and sales channels .

131 .THE AUTHOR SHMUEL (SAM) VAKNIN Curriculum Vitae Click on blue text to access relevant web sites – thank you. Ph. Full proficiency in Hebrew and in English.Israel Institute of Technology. Born in 1961 in Qiryat-Yam. Education Graduated a few semesters in the Technion . Certified in Psychological Counselling Techniques. Haifa. Israel. Served in the Israeli Defence Force (1979-1982) in training and education units. California.D. in Philosophy (major : Philosophy of Physics) Pacific Western University. Certified E-Commerce Concepts Analyst. Graduate of numerous courses in Finance Theory and International Trading.

Israel. Paris and New-York (NOGA and APROFIM SA): . in London.Project Manager of The Nigerian Computerized Census .Manager of the Data Processing Division .Chief Analyst of Edible Commodities in the Group’s Headquarters in Switzerland. The firm financed international multi-lateral countertrade and leasing transactions. 132 .Vice President in charge of Sovereign Debt Financing 1985 to 1986 Represented Canadian Venture Capital Funds in Israel. Gaon Group of Companies in Geneva. 1982 to 1985 Senior positions with the Nessim D.Vice President in charge of RND and Advanced Technologies .Business Experience 1980 to 1983 Founder and co-owner of a chain of computerized information kiosks in Tel-Aviv. 1986 to 1987 General Manager of IPE Ltd.Manager of the Research and Analysis Division . .

underwriting. a portfolio management firm based in Tel-Aviv. 1993 to 1994 Co-owner and Director of many business enterprises: . Consultant to foreign RND ventures and to Governments on macro-economic matters. Activities included large-scale portfolio management.Tesuah". the UK and the USA. forex trading and general financial advisory services.AVP Financial Consultants . Canada.1988 to 1990 Co-founder and Director of "Mikbats . mainly on issues related to the capital markets in Israel.The Omega and Energy Air-Conditioning Concern .Handiman Legal Services Total annual turnover of the group: 10 million USD. 1990 to Present Free-lance consultant to many of Israel’s Blue-Chip firms. President of the Israel chapter of the Professors World Peace Academy (PWPA) and (briefly) Israel representative of the “Washington Times”. 133 .

"Ha-Tikshoret and Namer". published and lectured on various occasions. Russia and the Czech Republic. Raised funds through a series of private placements locally.was tried for his role in an attempted takeover of Israel's Agriculture Bank. Canada and London. Assistant in the Law Faculty in Tel-Aviv University (to Prof. Managed the Internet and International News Department of an Israeli mass media group. In a legal precedent in 1995 . Israel’s largest computerized information vendor and developer. in the USA. wrote. Managed the Central School Library.studied in business schools and law faculties across Israel . Shoham). Director and Finance Manager of COSTI Ltd. 134 . S. 1996 to 1999 Financial consultant to leading businesses in Developing countries. Was interned in the State School of Prison Wardens.G. 1993 to 1996 Publisher and Editor of a Capital Markets Newsletter distributed by subscription only to dozens of subscribers countrywide.Co-owner.

An Open Directory Cool Site Philosophy ("Philosophical Musings") Economics and Geopolitics ("World in Conflict and Transition") 135 . by the Developing countriesn Stock Exchange and by the Ministry of Trade. "Central Europe Review" . 1999 to 2002 Economic Advisor to the Government of the Republic of Developing countries and to the Ministry of Finance. and other periodicals and in the economic programs on various channels of Developing countriesn Television. "Dnevnik".Collaborated with the Agency of Transformation of Business with Social Capital. "Izvestia". Chief Lecturer in courses organized by the Agency of Transformation. Economic commentator in "Nova Makedonija". 2001 to present Senior Business Correspondent for United Press International (UPI) Web and Journalistic Activities Author of extensive Websites in Psychology ("Malignant Self Love") . "Makedonija Denes". "Argumenti i Fakti". "The Middle East Times". "The New Presence".

Suite 101. eBookWeb and "Central Europe Review". Narcissus Publications.. 1988 "The Gambling Industry". Tel-Aviv. 1997 "The Developing countriesn Economy at a Crossroads On the way to a Healthier Economy" (with Nikola Gruevski). 1998 "Malignant Self Love . Limon Publishers. United Press International (UPI). InternetContent. Tel-Aviv.Short Stories".Owner of the Narcissistic Abuse Announcement and Study List and the Narcissism Revisited mailing list (more than 3900 members) Owner of the Economies in Conflict and Transition Study list. Limon Publishers. Editor of mental health disorders and Central and Eastern Europe categories in web directories (Open Directory. Columnist and commentator in "The New Presence". 1990 "Requesting my Loved One . 2002 136 . 2001.Narcissism Revisited". Tel-Aviv. Search Europe). 1999. Skopje. Publications and Awards "Managing Investment Portfolios in states of Uncertainty". Prague and Skopje. Yedioth Aharonot.

com.mk vaknin@link.The Narcissism Series . Contact Details: palma@unet.com.How the West Lost the East". 1998) "After the Rain . Prague. Skopje. 1999-2002) "The Exporters' Pocketbook". Many appearances in the electronic media on subjects in philosophy and the Sciences and concerning economic matters. Ministry of Trade. Republic of Developing countries. Hundreds of professional articles in all fields of finances and the economy and numerous articles dealing with geopolitical and political economic issues published in both print and web periodicals in many countries. 2000 Winner of numerous awards.mk 137 . The Rotary Club Award for Social Studies (1976) and the Bilateral Relations Studies Award of the American Embassy in Israel (1978). among them the Israeli Education Ministry Prize (Literature) 1997.e-books regarding relationships with abusive narcissists (Skopje. Prague and Skopje. 1999 "The Suffering of Being Kafka" (electronic book of Hebrew Short Fiction. Narcissus Publications in association with Central Europe Review/CEENMI.

com/contents.com/ Poetry: http://samvak.tripod.com/ Psychology: http://samvak.tripod.My Web Sites: Economy / Politics: http://ceeandbalkan.html Philosophy: http://philosophos.html Return 138 .com/index.tripod.tripod.

five Developing countriesns. in colourful and provocative prose. People stop to digest this metaphor and then they nod enthusiastically. It is like time travel. the conspiracies. The economics. The smells are heavy with muskular perfumes. It is like revisiting one's childhood. old fashioned suits and turn of the century moustaches. It is in the Balkans that all ethnic distinctions fail and it is here that they prevail anachronistically and atavistically. From "The Mind of Darkness": "'The Balkans' – I say – 'is the unconscious of the world'. the plough and the internet – it is all here.After the Rain How the West Lost the East The Book This is a series of articles written and published in 1996-2000 in Developing countries. West and East. the geopolitics. the old and the new. loaded with a roasted pig and exotic salads. the politics." 139 . retro hairstyles and too narrow dresses. How the West lost the East.buried under provocative mask-like make up. clad in sepia colours. I. the corruption. in Russia. We are seated at a New Year's dining table. in Egypt and in the Czech Republic. JudeoChristianity and Islam – is still easily discernible. In the background there is the crying game that is Balkanian music: liturgy and folk and elegy combined. It is here that the repressed memories of history. the Jew. It is here that the psychodynamics of humanity – the tectonic clash between Rome and Byzantium. Contradiction and change the only two fixtures of this tormented region. its traumas and fears and images reside. Four Serbs. The men. only half foreign to this cradle of Slavonics. The women of the Balkan .

a United Press International (UPI) Senior Business Correspondent.The Author Sam Vaknin is the author of Malignant Self Love Narcissism Revisited and After the Rain . Visit Sam's Web site at http://samvak.tripod.How the West Lost the East.com 140 . he served as the Economic Advisor to the Government of Developing countries. He is a columnist for Central Europe Review and eBookWeb . and the editor of mental health and Central East Europe categories in The Open Directory and Suite101 . Until recently.

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